Financial Glossary

These definitions have been simplified in order to convey the essence, as opposed to the strict technical meaning of, the concepts. In addition, certain terms may have slightly different meanings in other industries.

Terms which contain numbers are sequenced as if they were spelled out.The letter “M” is used to denote thousands, and “MM” represents millions.

Where foreign currencies are defined, the first entry in the definition is the standard SWIFT code for the currency. A cross-reference list of common SWIFT currency codes is on this page.

In the absence of any indication to the contrary, definitions should be interpreted in a US context.

The information contained herein is believed to be current as of this writing. However, users should bear in mind that the financial services business is constantly changing as a result of competition, technology, US and foreign legislative action, development of new products and services, etc., and therefore complete accuracy cannot be guaranteed.

A TRANCHE
Generally, the earlier amortizing (5 year final maturity) tranche of an 8 year loan. See BTranche.

ACCEPTANCE

See Bankers Acceptance, Trade Acceptance.

ACCOUNT ANALYSIS

A monthly report prepared by a bank for each of its commercial checking account customers that shows the services used by the customer, the price of those services, and the compensation received by the bank. It is essentially the bank’s profit and loss statement for that customer for that month.

ACCOUNT RECONCILIATION

A service offered by a bank that, in effect, balances a company’s checkbook for it.

ACCOUNTS PAYABLE

A/P. Money a company owes as a result of purchasing a product or service, but for which payment has not yet been made. See AccountsReceivable.

ACCOUNTS RECEIVABLE

A/R. Money owed to a company as a result of the sale of a product or service, but for which payment has not yet been received. SeeAccounts Payable.

ACCRUAL

The process of counting as income interest which has yet to be received in cash (anticipated interest payments), on the assumption that timely collection will occur. The objective is to smooth out the income stream. See Non-AccrualLoan.

ACCRUED INTEREST PAYABLE

Interest due to a customer on a deposit but not yet paid out. See AccruedInterest Receivable.

ACCRUED INTEREST RECEIVABLE

Interest earned on a loan or investment but not yet received. See AccruedInterest Payable.

ACH

Automated Clearing House. A method of electronic funds transfer for moving money by wire relatively inexpensively. Generally provides next day value rather than same day value, but at a much lower cost than Fedwire or CHIPS.

ACQUIRER

The bank that services a merchant who accepts credit cards, as opposed to the bank that issues the cards, the issuer.

ACTIVE INVESTMENT MANAGEMENT

A method of choosing investments whereby the investment manager continuously makes decisions regarding investments, and allocates funds based on assessments of the outlook for those specific investments. See Passive Invest­ment Management.

ACTUALS

Transactions in the physical (cash, or spot) commodity markets, rather than in the futures markets.

ADDITIONAL PAID-IN CAPITAL

See Surplus.

ADDITIONAL SETTLEMENT OBLIGATION

ASO. A method for increasing assurance of settlement finality on a funds transfer system. Each participant furnishes collateral. In the event a participant is unable or unwilling to settle, the collateral of that partici­pant, as well as that of the other participants, will be used to cover the obligations of the participant who is unable to settle, according to a predetermined loss-sharing arrangement.

ADMINISTRATION

A term for bankruptcy in some countries.

ADMINISTRATOR

An individual or institution appointed by a court to settle the estate of someone who has died intestate.

Also, the provider of certain administrative services to a mutual fund, such as printing the prospectus, handling the legal work, doing the auditing, etc.

Also, one who oversees the operations of a retirement plan.

Also, in some countries, someone appointed by a court to oversee the operations of a person or company which is in administration (bankrupt).

ADR

American Depositary Receipt. A method of owning foreign-issued securities without the difficulties associated with clearing and settle­ment overseas, currency conversion, receipt of dividends, etc. The ADR is actually a receipt issued by a depository representing shares of a foreign stock that have been deposited with it. The receipt is denominated in US currency and trades in the US like a US-issued security. The depository handles all the foreign clearing and settlement, currency conversions, etc.

ADVANCES

Loans.

ADVICE

Notification by a bank to a customer that a certain transaction has taken place (for example, a receipt of funds into an account). The advice may be by phone, mail, telex, fax, SWIFT, or electronically.

ADVISED LINE

Advised line of credit. Also called a confirmed line of credit. An understanding between a bank and its customer that the bank will lend up to a certain specified limit (the amount of the line), assuming no material adverse change in the borrower’s financial condition, within a certain period of time. It represents an expression of willingness on the part of the bank to lend (a moral obligation), but is not considered to be legally binding. SeeGuidance Line.

ADVISORY ACCOUNT

See Non-Discretionary Account.

AFFILIATE

Companies with common ownership.

AFFIRMATION

A communication from one party in a securities transaction to a second party in that transaction which indicates that the details of a confirmation sent by the second party are correct. It binds both parties to the transaction as agreed.

AFFIRMATIVE COVENANT

See Covenant.

AG

Aktiengesellschaft. A form of public, incorporated company in parts of Europe.

AGENT

One who acts for another (the principal), upon that party’s instructions, and by its authority.

Also, the bank that handles the administra­tive aspects of a loan syndication on behalf of the other banks (documentation, wire transfers, bookkeeping, etc.), and for which it will receive a fee.

AGREEMENT CORPORATION

Similar to an Edge Act Corporation, but state chartered. It has agreed to abide by the same federal regulations that apply to an Edge Act.

ALCO

Asset/liability committee. See Asset/LiabilityManagement.

ALLFINANZ

See Universal Banking.

ALL-IN RATE

An interest rate quoted to a customer that will contain all the elements of the bank’s compensation built into it. It is the total return the bank earns, and is effectively the borrower’s true cost.

ALLOWANCE FOR CREDIT/LOAN LOSSES

See Reserve for Credit/Loan Losses.

ALSI

Johannesburg Stock Exchange/Actuaries All Share 40 index. An index of stocks traded in South Africa. Similar in concept to the S&P 500.

Financial schedules published annually by many companies describing the company’s operating and financial results for the fiscal year.

ANNUITY

Generally refers to a stream of payments that goes on for the life of the annuitant, or for a specified number of years. Income from certain types of annuities is often exempt from taxes until withdrawn.

APACS

Association of Payment and Clearing Services. An umbrella organization for coordinating all payment methods in the UK.

APR

Annual percentage rate. The real cost of a loan, factoring in any fees that may be charged, the effect of compounding, etc.

ARBITRAGE

In its simplest form, the process of simulta­neously buying and selling the same commodity at slightly different prices, and profiting from the difference. For example, buying gold in New York at $380/ounce and selling it at the same time in London at $382/ounce would net $2/ounce. If you can execute the two transactions for less than $2/ounce (and not move the market in doing so), you make money.

AS AT

As of. Used in reference to the closing date for a balance sheet. “As at” is the British term which is becoming popular with the increasing emphasis by US banks on merchant banking.

ASIAN EXERCISE

An option in which the payoff is based on the average price of the underlying over a period of time.

ASKED PRICE

The price a seller is asking for the commodity it owns, in order to be induced to sell it. Sometimes called offered price. See BidPrice.

The coordination of the assets and liabilities of a bank’s balance sheet to maintain appropriate balance between safety, liquidity, and income. It is carried out by an asset/ liability committee.

ASSET MANAGEMENT

See Investment Management.

ASSIGNMENT

A method of purchasing a loan, whereby one bank assumes the rights and responsibili­ties of another with respect to a loan. Similar in concept to a participation, with some subtle legal and operational differences.

AT THE MONEY

An option in which the market price of the underlying is equal to the strike price. See In The Money, Out Of The Money.

ATM

See Automated Teller Machine.

ATTACHMENT POINT

The overall percentage level of losses in a CDO at which a given tranche begins to absorb losses. See Detachment Point.

AUDIT

A (presumed) independent examination of a company’s books.

AUTHORIZED SHARES

The maximum number of shares a corpora­tion is permitted by its articles of incorpora­tion (as amended) to have issued. See IssuedShares, Outstanding Shares, Treasury Stock.

AUTOMATED CLEARING HOUSE

See ACH.

AUTOMATED TELLER MACHINE

ATM. A machine, usually built into the side of a bank building, but sometimes free­standing or in other buildings (super­markets, for example), that allows deposits and withdrawals, balance inquiries, and other banking transactions.

B TRANCHE
Generally, the later amortizing (8 year final maturity) tranche of an 8 year loan. See A Tranche.

BACK MONTH

See Distant.

BACKUP LINE

See Commercial Paper Backup Line.

BACKWARDATION

A futures market term which indicates that nearby futures contracts are more expensive than the distant contracts. See Contango.

BAKEOFF

See Beauty Contest.

BALANCE SHEET

A statement (or listing) of the assets, liabili­ties, and stockholders’ equity of a corporation at a given point in time. For banks, also called a statement of condition. See Income Statement.

BALLOON LOAN

A loan with relatively small periodic prin­cipal payments, and one large payment (the balloon) at maturity. See Bullet Loan.

BANCASSURANCE

Banks (as opposed to insurance companies) selling insurance.

BANK

As defined in the Bank Holding Company Act, an institution that accepts demand deposits and makes commercial loans. SeeNon-Bank Bank.

BANK HOLDING COMPANY

A legal entity that owns one or more banks, in order to provide certain services that a bank may not legally provide. Users of these services often neither know nor care about the distinction.

BANK HOLDING COMPANY ACT

An act of Congress that limits ownership of banks to banking companies, and restricts interstate banking. There have been a number of exceptions since the act became law in 1956. See Douglas Amendment, Gramm-Leach-Bliley Act, Riegle-Neal Act.

BANK INVESTMENT CONTRACT

BIC. A contract offered by a bank to retirement plans that will pay a guaranteed rate of interest for an agreed upon period of time, but will allow the principal amount to be withdrawn at face value without penalty, upon the occurrence of certain prespecified conditions (disability of a retiree, for example). Similar in concept to a GIC.

BANKERS ACCEPTANCE

A draft whose payment at maturity has been assured by a bank. See Trade Acceptance.

BANKRUPTCY

Technically, where liabilities exceed assets.

Also, the legal state that prevents creditors from taking action against a debtor while a plan is developed to allow it to pay some or all of its debts. Chapter 7 results in liquidation of assets to pay debts, Chapter 11 is intended to reorganize a company and help it emerge as a going concern, while Chapter 13 reorganizes the debts of individuals. Chapter 9 covers municipal bankruptcies, and Chapter 12 reorganizes the debts of farmers.

In some countries, bankruptcy is called administration. See Insolvency.

BARRIER

Barrier or path-dependent option. An option that only becomes effective (knock-in) or is disabled (knock-out) when the underlying increases to a prespecified barrier level (up and in or up and out) or decreases to the barrier (down and in or down and out). These options are generally cheaper than plain vanilla options.

BASE RATE

See Reference Rate.

BASEL/BASEL II

Basel, Switzerland, is the headquarters for the Bank for International Settlements (BIS). Basel II is the BIS-driven complex risk-based capital replacement scheme for the original 1990 Basel agreement.

BASIS

In futures markets, the difference between the cash price and the futures price.

In terms of interest rates regarding loans and deposits, See Interest Basis.

BASIS POINT

1/100 of a percent. There are 100 basis points in one percentage point. The difference between a rate of 11.30% and 11.27% is 3 basis points.

BASIS RISK

The risk that a position being hedged is not perfectly hedged, often because the hedging instrument does not respond to market changes in the same fashion as the underlying position.

BBA

British Bankers Association.

BEAR

An investor whose view of the market is that it will go down. See Bull.

BEARER

As applied to securities, it means that the physical holder of the security is considered to be the owner. See Registered.

BEAUTY CONTEST

A competition held by a company issuing securities to select a lead underwriter. Sometimes called a bakeoff.

BENEFICIARY

In funds transfers, the one who will receive the proceeds of the transfer.

In letters of credit, the one who will receive payment when the conditions of the L/C have been satisfied.

In trusts and estates, one who will receive income or property.

BHD

Berhad. Malaysian for “inc.”

BIC

Bank Identifier Code. An 11 (sometimes only 8 are used) character code used by the SWIFT system to identify the sender or receiver of a message. The first 4 characters identify the bank, the next 4 the country (and sometimes city or other geographic unit) and the last 3 can be used by the bank to designate a particular branch or department. The BIC is sometimes referred to as the SWIFT code.

Also, See Bank Investment Contract.

BID PRICE

The price a buyer of a commodity is willing to pay for the commodity. See Asked Price.

BID WEEK

The last week of the month during which producers and consumers arrange their sales and purchases of physical natural gas for the following month.

BIF

The Bank Insurance Fund. The part of the FDIC that insured bank deposits (although some thrifts were also insured by the BIF). The BIF and the SAIF were merged in 2006 to create the Deposit Insurance Fund.

BIG BANG

October 27, 1986. The day the UK deregu­lated its stock markets.

BILATERAL LIMIT

At one time, a limit each CHIPS participant must set for every other participant, representing the maximum net amount it is willing to receive from each of those banks. Since CHIPS payments are not final until late in the day, the bilateral limit sets the maximum risk each bank would face should a counterparty be unwilling or unable to settle. These limits are no longer used due to CHIPS settlement finality.

BILL OF EXCHANGE

See Draft.

BILL OF LADING

A receipt for and title document to goods in transit, issued by a shipping company. It is evidence that the goods have been accepted for shipment. Generally used in a letter of credit transaction. The importer needs the bill of lading to take possession of the goods, but the exporter doesn’t want to release it until he gets paid.

An on-line information service and market data provider that furnishes quotes on financial instruments to its subscribers. Similar to Reuters.

BLOTTER

The record of a trader’s transactions, showing quantity bought or sold, price, and counterparty.

BLUE SKY LAWS

State laws which regulate the sale of securities within the state. See Series 63.

BMV

Bolsa Mexicana de Valores. The Mexican stock exchange.

BOLERO

A system for automating the exchange of trade finance documents using the internet. A form of EDI.

BOLSA

What some countries call their stock exchanges.

BOND

A long-term secured borrowing issued under the terms of an indenture. A corporate IOU. See Debenture.

BOND COUNSEL

A law firm retained by an issuer of bonds prior to issuance to assure that the issuer has the legal right to issue the securities and that it can comply with the terms of the indenture.

BOND MARKET ASSOCIATION

A trade group of securities dealers. This group was merged into SIFMA.

BOOK BUILDING

The process, conducted by the underwriters, of determining investor interest in securities to be issued.

BOOK ENTRY

Book entry security. A security issued in certificateless form, with holders’ records maintained electroni­cally by a depository. No paper certificate is issued. In this context, See Definitive.

Also, a transaction in which the debit and credit parties have accounts with the same institution.

BOOK RUNNER

The lead or managing underwriter who keeps the records of the securities being sold.

BOOK TRANSFER

A transfer of funds or securities in which both parties have accounts with the same institution, so the transfer is effected by entries on the books of that single institution. See Non-book Transfer.

BOOK VALUE

The value of an ownership interest (for example, a share of stock) as per the books of a corporation.

Also, the value at which an investment is carried on a company’s books (which may or may not be equal to its market value).

BOOK VALUE WRAPPER

The product that guarantees the full return of principal in a synthetic GIC or BIC.

BOURSE

What some countries call their stock exchanges.

BOVESPA

Bolsa de Valores de São Paulo. The São Paulo stock exchange, and an index of stocks traded on that exchange, similar in concept to the S&P 500.

BRANCH

For banks, a branch is an office at which deposits are accepted, loans are made, or checks are paid. The McFadden Act prohibited banks from branching outside their home state, unless permitted by the other state. SeeRiegle-Neal Act.

BREAKUP FEE

A fee received by an M&A advisor (or by the acquirer or target) if a proposed acquisition isn’t completed.

BRENT

A variety of crude oil produced in the North Sea.

BRIDGE LOAN

In corporate finance, a short term loan, typi­cally to enable an M&A transaction to be completed (so the investment bank can get its fee). The bridge loan would be repaid by the issuance of junk bonds or the sale of stock.

BROKER

One who buys or sells on behalf of others, with no liability or risk on the part of the broker. See Principal.

BROKER/DEALER

A generic term to indicate an institution whose primary business is securities, such as a stockbroker, investment bank, or securities underwriter.

BROKERED DEPOSITS

Time deposits (usually just under $100M, the FDIC insurance limit) brought into a bank by an independent third party (the broker), who receives a fee from the bank for doing it. It is a way for a bank to raise money outside its own market area. Since the deposits are insured, the depositors usually don’t care who the bank is.

BROKER’S LOAN

A loan to a securities dealer, usually to enable the dealer to purchase securities, and collateralized by the securities being purchased.

BTAN

Bons du Trésor à Intérêts Annuels. French government securities with original maturities of 2 and 5 years.

BTF

Bons à Taux Fixe. Short term French government trea­sury bills issued at a discount.

BUILDING SOCIETY

A UK financial institution whose primary function historically has been to take deposits and make residential housing loans. Changes in legislation now permit them to offer a much wider variety of banking services. They are somewhat similar to thrifts in the US.

BULL

An investor whose view of the market is that it will go up. See Bear.

BULLET LOAN

A loan with no periodic amortization of principal. The total amount is paid at maturity. See Balloon Loan.

CAC quarante. An index of 40 stocks listed on the Paris stock exchange. Similar in concept to the S&P 500. CAC stands for Compagnie des Agents de Change, the association of French stockbrokers.

CALL

The right of the issuer of a debt security to pay it off prior to its contractual maturity date.

Also, a type of option in which the seller or writer gives to the buyer, for a fee, the right to purchase a specified amount of the underlying commodity for a fixed price called the strike or exercise price (regardless of the market price at the time of purchase), up to a certain date (American-styleoption) or on a certain date (European-style option). See Put.

CALL BLENDING

A characteristic of some call centers that allows switching between outbound and inbound functions depending on the relative volumes of each.

CALL CENTER

A large room or building filled with people whose function is to call you at dinner time to sell their products (outbound) or to receive your inquiries and complaints (inbound) via a toll-free number. There are also virtual call centers, without a central location. Commonly used for telemarketing.

CALL MONEY

A form of time deposit, common outside the US, where the depositor has the right to receive the deposit back upon demand or sometimes with two days notice to the bank.

CALL PROTECTION

A certain period of time after issuance (often 5 or 10 years) before a callable bond can be called (paid off early).

CALLABLE BOND

A bond which, under certain conditions, the issuer has the right to pay off early, generally after a certain period of time (often 5 or 10 years) has elapsed. See Puttable Bond.

CAMEL(S)

A rating system used by bank regulators to judge the health of a bank. It uses a 1 – 5 scale (1 being the best), rating a bank on its capital, asset quality, management ability, earnings, liquidity, and sensitivity to market risks. A composite, or overall rating, is given as a summary of the 6 component ratings.

CAP

Net debit cap. A limit to the maximum daylight overdraft a bank may incur on Fedwire or CHIPS. Initially set up in March, 1986 in order to reduce the chance that a bank may be unwilling or unable to make a payment while in an overdrawn position on the payments system. The risk to the payments system is similar to that of a bank when it pays a check for which there are insufficient customer funds to cover it. The cap is a func­tion of the bank’s total capital and its management and operational capabilities, among other factors.

Also, a capital markets product in which the writer or seller of the cap guarantees to the buyer that a given reference rate (interest, foreign exchange, or commodity) will not exceed a certain value. If it does, the writer will make payments to the buyer based on the difference in rates and the notional principal agreed to. See Collar, Floor, Forward Rate Agreement.

CAP RATE

The rate above which a cap will begin to make payments. See Floor, Floor Rate.

CAPITAL

A measure of the protection a company affords its creditors against losses. In banking, capital consists of stockholders’ equity, plus possibly a number of other equity-like instru­ments. See Risk-Based Capital, Tier 1 Capital, Tier 2Capital, Tier 3 Capital, Total Risk-Based Capital.

CAPITAL ADEQUACY

The capital a bank has in relation to the size of the bank’s assets. See Risk-Based Capital.

CAPITAL INTELLIGENCE LIMITED

A Cyprus-based company which evaluates the creditworthiness of middle-Eastern, African, and Asian banks.

CAPITAL MARKETS

Traditionally defined as the markets in which money would be raised for periods of over 1 year, and which would therefore consist of the stock and bond markets. A more comprehensive definition would include all financial services other than pure bank lending, covering transactions such as securities underwriting and trading, swaps and other derivatives, private placements, M&A, FX, and corporate finance. See Money Market.

CAPITAL SURPLUS

See Surplus.

CAPITALIZATION

Market capitalization, market cap. The number of shares of a company that are outstanding multiplied by the market price per share. The total market value of the company.

CARRIED INTEREST

The portion of profits received by a private equity general partner after the limited partners have received their capital and a return.

The public sale of minority ownership in a company’s subsidiary in order to create a second company with more attractive growth and market valuation prospects than the parent.

CASH

Currency and coin. Sometimes called vault cash.

CASH BASIS LOAN

See Non-Accrual Loan.

CASH FLOW WATERFALL

The algorithm that determines the priority sequence in which payments will be made in an asset-backed or similar security.

CASH LETTER

A group of checks, along with a listing of those checks, sent by one bank to another for collection. It is essentially one bank’s deposit in another.

CASH MANAGEMENT SYSTEM

A fee-based service offered by banks to optimize the availability of funds for corporate customers. It’s designed to reduce the time it takes for funds to become available for the corporation’s use (collection system), or to maximize (within limits) the time that funds remain in the corp­oration’s accounts (disbursement system). The corporation can therefore either invest more, or borrow less, increasing its profits. See Controlled DisbursementAccount, Lockbox.

CASH MARKET

The market for an underlying commodity, rather than for a derivative based on the commodity.

CASH PRICE

Sometimes called the spot price. In general, the price for an underlying commodity, rather than for a derivative based on the commodity. In the futures markets, it refers to the price for immediate (as opposed to future) delivery of the commodity.

CASH SETTLEMENT

An options or futures transaction in which the party obligated to make a payment will do so in cash, rather than in a specific underlying commodity (such as shares of stock or barrels of oil). See Deliverable.

CBO

See Collateralized Bond Obligation.

CBOE

Chicago Board Options Exchange. An exchange for the trading of options.

CBOT

Chicago Board of Trade. An exchange for the trading of futures and options. Part of the CME Group.

CCD/CCD+

Cash concentration and disbursement (plus). ACH transactions generally used for intracompany payments. The CCD moves money only, the CCD+ moves money and a limited amount of information about the payment. See CTP, CTX.

A bank, usually but not always part of the national government, that is typically responsible for: distribution of currency and coin; control of the money supply, interest rates and inflation; managing the value of the currency in foreign exchange markets; chartering, supervision and regulation of banks and sometimes other financial institutions; and compilation and publication of economic statistics. Not every central bank will carry out every one of these functions. The specific functions for which a particular central bank is responsible will vary from country to country.

CENTRAL REGISTRATION DEPOSITORY

CRD. A central file of all securities brokers in the US.

CENTRAL SECURITIES DEPOSITORY

CSD. A central location within a country or region for holding, clearing, and settling securities and securities transactions (typically but not always electronically). Examples are CREST, DTC, Euroclear, and Clearstream.

CERTIFICATE OF DEPOSIT

CD. A time deposit, often negotiable, evidenced by a certificate. See Other TimeDeposits.

CETANE NUMBER

An indicator of the ignitability of diesel fuel. Analogous to the octane number of gasoline.

CETE

Certificados de la Tesoreria de la Federacion. A Mexican government security, denomi­nated in Mexican pesos.

CFTC

See Commodity Futures Trading Commission.

CHAPS

Clearing House Automated Payments System. The sterling funds transfer system used in London. It is similar in concept, but not identical to, Fedwire. Eurochaps is used to transfer euros.

CHAPTER 7/9/11/12/13

See Bankruptcy.

CHARGE-OFF

To reduce all or part of the value of an asset to zero, to reflect the fact that the charged-off part is essentially worthless. Sometimes called write-off.

CHECK

As defined in the Uniform Commercial Code in the United States, a check is a draft drawn on a bank, payable upon demand. More generally, a paper-based payment or transac­tion mechanism.

CHECK CLEARING

The process of checks being transported for payment from the bank in which they are deposited to the bank on which they are drawn, and subsequent payment for those checks. See Check 21.

CHECK 21

Check Clearing Act for the 21st Century. This 2004 legislation permits (but does not require) banks to create check images (substitute checks) to send to paying banks for collection instead of sending the actual checks as was previously required. The paying bank is required to accept a printed substitute check as the legal equivalent of the original check. The intent is to reduce the volume of paper checks and speed up check collection.

CHEQUE

Variation of check.

CHF

SWIFT currency code for the Swiss franc.

CHICAGO MERCANTILE EXCHANGE

CME. The Merc. An exchange for the trading of futures and options. Part of the CME Group.

CHIPS

Clearing House Interbank Payments System. A funds transfer system run by the New York Clearing House Association. It is the primary means of settling eurodollar and FX transac­tions for large New York City banks, as well as many others engaged in international transac­tions. Settlement occurs periodically throughout the day; transactions so settled are considered final and irrevocable.

CHOOSER

Chooser option. An option which initially is neither a call nor a put. The buyer decides at a later point (the chooser date) which form the option will take. This exotic option is more expensive than a plain vanilla option.

CHURNING

The excessive buying and selling of securi­ties in a brokerage account by a broker in order to generate commission revenue.

CITY

See The City.

CLASSIFIED

A loan or other asset that has been cited by an examiner as being of questionable collectibility. Degrees of classification are (in order of increasing severity) substandard, doubtful, and loss. A loss asset must be charged-off. See Criticized.

CLAWBACK

Investors’ ability to reclaim general partner’s profits if the investors have not received their minimum payout.

CLEAN COLLECTION

A bank product, similar to a documentary collection, but where no documents are involved. Examples are collecting a check drawn on an overseas bank, or collecting a bond coupon.

CLEARING

In securities transactions, the matching of trade information by buyers and sellers, to assure each has the same understanding of the transaction, and the subsequent receipt of (and payment for) the securities. May also include a netting process prior to final settlement.

In check processing, See Check Clearing.

CLEARING BANK

A bank to whom a customer (generally another bank, broker/dealer, or institutional customer) would bring checks or securities for subsequent presentation to (and collection of funds from) another institution (or from whom they would be received in exchange for payment).

CLEARING BROKER

See Introducing Broker.

CLEARINGHOUSE

An institution set up to clear, net, and settle financial transactions (checks, securities, FX, etc.).

In certain types of exchanged-traded financial transactions, a clear­inghouse is used to guarantee payments. Once the details of a trade have been agreed upon by the parties involved, the clearinghouse becomes the counterparty to each.

CLEARINGHOUSE FUNDS

See Federal Funds, Next Day Funds.

CLEARSTREAM

A securities depository, clearance, and settle­ment system, headquartered in Luxembourg. A joint venture of Cedel and Deutsche Börse Clearing. Similar in concept to Euroclear and DTC.

CLO

See Collateralized Loan Obligation.

CLOSE OUT

To reduce a risk position to zero by selling (or buying) an equal amount of the identical securities or commodity bought (or sold).

CLOSED END FUND

A mutual fund that will only issue a certain number of shares. After those shares have been sold, they can only be bought from another investor. See Open End Fund.

CLOSING RANGE

Depending on the particular market, either the final few minutes of trading on a given day, or the high and low prices between which transactions took place at the close of trading.

CLS, CLS BANK

See Continuous Linked Settlement.

CME

See Chicago Mercantile Exchange.

CME GROUP

Parent of the CBOT and the CME.

CMO

See Collateralized Mortgage Obligation.

COLLAR

Sometimes called a cylinder. Buying a cap and selling a floor. Together, they place upper and lower limits on interest rate (currency, commodity price) fluctuations. A zero-cost collar is where the fee paid for buying the cap is exactly offset by the fee received for selling the floor.

COLLATERAL

Property pledged by a borrower to reduce a lender’s risk in making a loan. The collateral will generally be sold in the event of a default on the loan. Usually, a loan should never be made on the strength of collateral alone.

COLLATERALIZED BOND OBLIGATION

CBO. A form of asset-backed security, backed by bonds formed into various pools or tranches. The pools have different risk, return, and maturity characteris­tics.

COLLATERALIZED DEBT OBLIGATION

CDO. A form of asset-backed security, backed by different types of debt instruments (bonds, notes, loans) formed into various pools or tranches. The pools have different risk, return, and maturity characteris­tics. If the underlying assets are other CDO’s, then it is known as a CDO^2 (CDO squared).

COLLATERALIZED LOAN OBLIGATION

CLO. A form of asset-backed security, backed by (usually) commercial loans formed into various pools or tranches. The pools have different risk, return, and maturity characteris­tics.

COLLATERALIZED MORTGAGE OBLIGATION

CMO. A form of mortgage-backed security, backed by residential mortgages formed into various pools or tranches. The pools have different risk, return, and maturity characteris­tics. See Pass-Through.

COLLECTED BALANCE

The balance in a checking account that has actually been collected. It omits uncollected funds (float). See Ledger Balance.

COLLECTED FUNDS

Funds that have gone through the check clearing process and are available for use by a bank or its depositor. See Float.

COLLECTIVE INVESTMENT FUND

See Common Trust Fund.

COMMERCIAL LENDING

Corporate lending. The function within a bank that lends to businesses (as opposed to lending to individuals, called consumer lending).

COMMERCIAL PAPER

Short-term (maximum 270 days in the US), unsecured corporate IOU’s generally sold at a discount and redeemed at maturity at par. For the largest, most creditworthy banks and corporations, it is an important source of funds. Commercial paper is the corporate equivalent of a US government treasury bill – ­the only difference is the issuer.

COMMERCIAL PAPER BACKUP LINE

Backup line. An agreement by a bank to lend money to a commercial paper issuer if the issuer is unable to rollover its maturing commercial paper.

COMMITMENT

Agreement by a bank to lend money. A legal commitment legally obligates the bank to lend the money. There are varying degrees of the bank’s obligation.

COMMITMENT FEE

The fee a bank charges for agreeing to provide funds to a customer at some point in the future. It is normally charged on the unused portion of those commitments that a bank is legally obligated to honor.

COMMITMENT OVERHANG

See Unfunded Commitment.

COMMITTED FACILITY

A loan commitment evidenced by a written contract between the bank and borrower listing all the specific terms and conditions of the loan. See Uncommitted Facility.

The 1936 act of Congress that set the frame­work for the regulation of futures trading in the US.

COMMODITY FUTURES TRADING COMMISSION

CFTC. An organization, similar in concept to the SEC, that regulates the commodity futures business in the US. Established in 1974.

COMMODITY POOL OPERATOR

CPO. An entity that invests a pool of money from a group of investors in commodities. Similar in concept to a mutual fund.

COMMODITY TRADING ADVISOR

CTA. An investment advisor for commodities.

COMMON STOCK

See Stock.

COMMON TRUST FUND

A collective investment fund. An investment vehicle operated by a bank, in which assets of customers are pooled and invested collectively. Similar in concept to a mutual fund, but is not registered nor regulated as a mutual fund. It is available only for the bank’s trust customers.

COMMUNITY BANK

Generally used to indicate a relatively small bank, operating only in a single community or very limited area, with just a few branches (sometimes only one). See Money Center Bank,Regional Bank, Supercommunity Bank.

COMMUNITY REINVESTMENT ACT

CRA. A 1977 act of Congress that requires banks to affirmatively meet the credit and banking needs of their community. Banks have had their merger, acquisition, branching, and expansion plans denied on CRA grounds.

COMPANION CLASS

Support class. The tranche of a CMO that accepts the major part of the prepayment and extension risk of a PAC or TAC, and receives a higher expected total return in exchange.

COMPENSATING BALANCE

A non-interest-bearing demand deposit maintained at a bank, as part of the compensa­tion for a loan or service provided. These deposits are very valuable to the receiving bank, since they do not pay interest on them. See Correspondent.

COMPETITIVE ADVANCE FACILITY

See Competitive Bid Facility.

COMPETITIVE BID FACILITY

A form of loan syndication, normally occur­ring in conjunction with a revolving credit. The borrower solicits bids from each bank, who will then specify the interest rate at which they will lend. The borrower chooses the bank with the lowest rate. Also called a competitive advance facility.

COMPETITIVE UNDERWRITING

See Underwriting.

COMPOUNDING

Compound interest. A method of computing interest on a deposit account. The interest earned is periodically added into the account, which then earns interest on the interest. Simple interest lacks this feature. See Present Value.

COMPUTER TELEPHONY INTEGRATION

CTI. Integrating computer hardware and software into call center functions, so that the call center representative is provided immediate information on the caller and their relationship with the company via caller ID and database integration.

CONDUIT

See Special Purpose Corporation/Vehicle.

CONFIRMATION

The exchange of the details of a transaction by the two parties to that transaction to assure that each has the same understanding of the transaction. The exchange may take place via phone, fax, telex, SWIFT, internet, or other means.

Also, an agreement by a bank to make a payment under a letter of credit (L/C) if the bank that issued the L/C doesn’t make the payment.

CONFIRMED LINE

See Advised Line.

CONSOLIDATED

An accounting term regarding financial statements of a company. It indicates that the results include those of essentially all of the company’s subsidiaries, on a combined basis, after eliminating any business that company subsidiaries do with each other (intercompany transactions).

CONSUMER

A class of bank customer whose deposits generally are under the FDIC insurance limit. Also called retail customers.

CONSUMER LENDING

The function within a bank that lends to individuals (as opposed to lending to busi­nesses, called commercial lending).

CONTANGO

A futures market term which indicates that distant futures contracts are more expensive than nearby contracts. See Backwardation.

CONTINGENT DEFERRED SALES CHARGE

See Load.

CONTINGENT LIABILITY

A potential obligation of a bank to make a payment if, for example, someone else doesn’t (as in a standby letter of credit). Contingent liabilities represent risk in the bank that do not, at present, appear directly on the bank’s balance sheet, although they are, under certain circumstances, counted in computing a bank’s risk-based capital requirements.

CONTINUOUS LINKED SETTLEMENT

CLS. A settlement mechanism for either money or securities transfers in which net settlement occurs on an on-going basis, rather than at the end of the day or even later, in order to reduce settlement risk. The CLS Bank in London provides CLS services for FX settlements. Banks maintain multicurrency accounts with CLS Bank, and payments are made only if both participants have the necessary funds (payment vs. payment). See Gross Settlement.

CONTROLLED DISBURSEMENT ACCOUNT

A checking account offered to companies as part of a cash management system in which money is deposited only as needed to cover the checks being presented for payment that day. See Remote Disbursement.

CONVERTIBLE

A security (usually a bond or preferred stock) that may, under certain conditions, be exchanged for shares of common stock.

CONVERTIBLE REVOLVING CREDIT

See Revolving Credit.

CONVEXITY

The rate of change of the duration of a bond. Using duration without regard to convexity can misstate the price change of a bond.

COOKE RATIO

See Total Risk-Based Capital Ratio.

CORE CAPITAL

See Tier 1 Capital.

CORE DEPOSITS

That portion of a bank’s deposits that tends to be relatively stable, at least in the near term. Generally consists of consumer deposits, and certain types of business deposits. These deposits tend to have some degree of rate and risk insensitivity and inertia. Core deposits are a major, low cost source of funds for banks. SeePurchased Funds.

Services performed for the issuer of stock by a bank, such as transfer agent, registrar, or divi­dend disbursing agent. See Corporate Trust.

CORPORATE FINANCE

Investment or merchant banking services which encompass the financing of corporations. Specific services include stock and bond underwriting, financial planning, M&A, and various advisory services.

CORPORATE LENDING

See Commercial Lending.

CORPORATE TRUST

Services performed for the issuer of bonds by a bank, such as indenture trustee, bond registrar, or paying agent. See Corporate Agency.

CORPORATION

A form of business organization in which the owners are legally separate from the company, and who therefore have limited personal liability for the obligations of the company. Their risk of loss is limited to the amount of their investment. The company will be considered incorporated, and, in the US, will generally have “inc.” as part of the company name. Other countries have similar designations. SeePartnership, Public Limited Company, Sole Proprietorship.

CORRESPONDENT

Correspondent bank. A bank that provides services for another bank, and for which the other bank (the respondent) generally maintains compensating balances or pays a fee. Typical services are check clearing, funds transfers, loan participations, and securities safekeeping.

COST TO INCOME RATIO

See Efficiency Ratio.

COUNTERPARTY

The other party to a transaction.

COUNTRY RISK

The risk that a foreign government might take action to prevent return of an asset (loan, investment, interest owed, etc.). Also called sovereign, geographic, or political risk.

COUPON

The interest rate or interest payment on a bond is generally referred to as the coupon, or the coupon rate.

Also used to indicate the fact that interest is collected periodically, rather than just at matu­rity. See Discount.

COVENANT

A set of conditions imposed upon a borrower, documented in a loan agreement, as a way of protecting the lender, who is gener­ally obligated to lend the money unless a covenant is breached. Affirmative covenants are conditions the borrower must meet (e.g., make payments on time), negative covenants are those the borrower must not (e.g., take on additional debt without the lender’s permission).

COVERED

Covered call writing. Writing (selling) a call option while owning the underlying. Generally used in stagnant or declining markets to generate premium income, while giving up much of the upside potential. See Naked.

COVERED BOND

A form of asset-backed security, usually mortgages, in which the assets remain on the issuer’s balance sheet rather than being sold to and issued by a separate entity. Popular mostly in Europe.

CPO

See Commodity Pool Operator.

CRA

See Community Reinvestment Act.

CRACK

Crack spread. The difference in price between the crude oil futures contract and that of refined products. It is the refining margin.

CRAMDOWN

A security, typically of the junk or “funny money” type, given in exchange for other secu­rities of the same issuer. Usually the issuer can’t pay the interest on the original security, so the holders either accept the cramdown, or are left holding the original, which then goes into default. The cramdown is generally struc­tured to avoid cash interest payments for some time, such as through a zero coupon or PIK structure.

CRD

See Central Registration Depository.

CREDIT

Lending money, such as extending credit.

Also, an accounting transaction that increases a liability account, or reduces an asset account. In this context, See Debit.

CREDIT CARD

A plastic card, which, when used, extends credit to the holder by the issuer of the card by making a payment to the merchant. The holder of the card will subsequently receive a bill, which may then be paid in full or over time, incurring interest charges. See Debit Card, Smart Card.

CREDIT DEFAULT SWAP

CDS. An agreement by one party (seller of the swap) to make a payment to another (buyer of the swap)upon the occurrence of a credit event. The seller receives a periodic fee in exchange for taking the risk.

CREDIT ENHANCEMENT

A method of improving the creditworthi­ness of some sort of borrowing arrangement. Typical methods involve overcollateralization or cash collateral, senior/subordinated structure, or a standby letter of credit.

Facility. A bank’s agreement to extend credit to a borrower. E.g., a $3MM term loan facility.

CREDIT RATING AGENCY

A company that provides ratings about the ability of a borrower (usually a corporation or a municipality) to pay principal and interest on its debts. The most common of the rating scales typically go from AAA (the top grade) down to D (highly speculative, in default, payment unlikely, etc.). See Investment Grade,Non-Investment Grade, NRSRO.

CREDIT RISK

Default risk. The risk that a borrower will be unable to repay a loan. See Interest Rate Risk.

CREDIT UNION

A type of depository institution in which all the members generally share some common bond or characteristic, such as the same employer. They typically have low expenses, and are presently exempt from federal income taxes and the CRA.

CREST

A securities depository, clearance and settlement system in the UK operated by Euroclear.

CRITICIZED LOAN

A classified or OLEM loan.

CROSS RATE

The FX rate between two non-dollar curren­cies. E.g., the euro/yen cross would involve buying (or selling) euro for yen without the US dollar being part of the transaction.

CRUSH

Crush spread. The difference in price between the soybean futures contract and that of soybean meal and soybean oil. It is the processing margin.

CSD

See Central Securities Depository.

CTA

See Commodity Trading Advisor.

CTI

See Computer Telephony Integration.

CTP/CTX

Corporate Trade Payment, Corporate Trade Exchange. Forms of ACH transactions that carry more payment information than the CCD or CCD+, the CTX being able to carry the most.

CURRENCY RISK

The risk that the net value of foreign currency assets and liabilities will decline.

CURRENT ACCOUNT

A term used in some countries to denote a checking account. Interest may or may not be paid on these accounts.

CUSHING

Cushing, Oklahoma. The delivery point for the NYMEX crude oil contract (WTI).

CUSIP

CUSIP number. A unique 9 digit identification number assigned to securities in the US to facilitate processing. CUSIP stands for Committee on Uniform Securities Identifica­tion Procedures.

CUSTODIAN

One who provides custody services.

CUSTODY

A service that banks provide in which they hold securities on behalf of customers, collect interest and dividends, present called and matured securities, and provide recordkeeping services. It relieves their customers of the administrative aspects of managing a portfolio.

The maximum amount a futures contract can fluctuate in value in a day. Daily limits are set by the exchanges on which the futures are traded. Not all futures contracts have daily limits and those that do can modify them depending on contract months or volatility. If the value goes up or down the limit, it is said to be limit up or limit down.

DARK LIQUIDITY

Buyers and sellers who negotiate terms in private transactions and whose presence is not generally known.

DATED DATE

The date from which interest begins to accrue on an interest-bearing security.

DAX

Deutsche Aktien Xchange. An index of stocks traded on the Frankfurt exchange. Similar in concept to the S&P 500.

DAYLIGHT OVERDRAFT

Usually refers to an overdraft in a bank’s reserve or clearing account during the course of the day. These overdrafts generally occur because of timing differences in a bank’s cash flows. Since a large daylight overdraft not cleared up by the close of business could cause prob­lems in the payments system, many central banks do not permit them unless fully collateralized. See ASO, Cap.

DDA

See Demand Deposit Account.

DEALER

See Market Maker.

DEBENTURE

A medium or long-term unsecured borrowing issued under the terms of an inden­ture. A corporate IOU. See Bond.

DEBIT

An accounting transaction that increases an asset account, or reduces a liability account. See Credit.

DEBIT CARD

A plastic card which, when used, will cause money to be taken from your checking account and moved to a merchant’s account. The transaction is similar to a check, except it takes place electronically and much more rapidly. See Credit Card, Smart Card.

DEBT

Borrowed money. Debt is a liability.

Also, a security representing a borrowing.

DEBT SERVICE

Interest paid on borrowed money.

DEBT SERVICE RATIO

The ratio of a company’s profits to its debt service requirements. It is a measure of how much those profits could decline and still pay the interest due. A ratio of 1 means there is just enough to pay the interest. Sometimes called interest coverage ratio or times interest earned.

DEBTOR IN POSSESSION

DIP. A company under the protection of the Bankruptcy Code.

DEFAULT

Failure to meet a financial obligation when due. Most commonly, a missed principal or interest payment.

DEFEASANCE

Providing collateral (usually cash or US government securities) irrevocably to a trustee to assure repayment of outstanding debt (usually bonds of some sort). Even though the bonds are still outstanding, for all practical purposes they are extinguished. The effect is to release the issuer of the bonds from some or all of the terms of the indenture.

DEFINED BENEFIT

A type of pension plan in which the employer guarantees a specific level of pension benefits to its employees (usually based on length of service and salary), and is obligated to provide sufficient funding to assure that payout. See Defined Contribution.

DEFINED CONTRIBUTION

A type of pension plan in which the employer agrees to provide certain annual contributions in the names of its employees (usually a percentage of salary), and the amount each employee receives upon retire­ment depends only on the investment perfor­mance of the funds. No level of benefits is guaranteed. Certain defined contribution plans allow the employee to make contribu­tions as well. See Defined Benefit.

DEFINITIVE

Definitive security. A security issued in physical, or certificate form. See Book Entry.

DELIVERABLE

An options or futures transaction in which the party obligated to make a payment will do so in a specific underlying commodity (such as shares of stock or barrels of oil), rather than in cash. See Cash Settlement.

DELIVERABLE GRADE

The quality specifications a commodity must meet in order to be deliverable into a futures contract to meet a delivery obligation.

DELIVERY POINT

A location for delivery of the commodity underlying a futures contract. Each contract will have its own delivery point or points, which are set by the futures exchange on which the contract is traded.

DELIVERY RISK

See Settlement Risk.

DELIVERY VS. PAYMENT

DVP. A settlement system in which the item purchased is transferred to the buyer simulta­neously with payment from the seller. If either party is unable to complete its part of the transaction, the transaction is not consummated. See Payment vs. Payment.

DELTA

The amount by which the price of an option changes for a given change in the price of the underlying.

DELTA HEDGING

A technique used by option writers for attempting to assure that changes in the short option position are offset by opposite changes in a long underlying position, so the position makes money no matter what happens to the market (a market neutral strategy). Delta hedging often works better on paper than in the real world, as the conditions necessary to delta hedge do not always exist in rapidly moving and/or illiquid markets.

DEMAND DEPOSIT ACCOUNT

DDA. A deposit account from which the depositor has the right to withdraw upon demand (i.e., a checking account). In the US, banks may not pay interest on these accounts, and which are therefore the cheapest source of funds for a bank. See Time Deposit.

DEMAND LOAN

A loan with no specific maturity date. The bank may legally demand repayment at any time.

DEMATERIALIZE

Replacing the issuance of paper certificates (stocks, bonds, etc.) with electronic entries on a depository’s books.

DEPOSIT

Money placed in a depository institution and subject to withdrawal and possibly the right to earn interest, under terms and condi­tions defined by the deposit agreement. Deposits are generally covered wholly or partially by insurance.

DEPOSIT INSURANCE FUND

The FDIC insurance fund created in 2006 by the merger of the BIF and the SAIF. It insures bank and thrift deposits.

DEPOSIT PLACEMENT

A deposit made (placed) with a bank. Often, but not always, used to denote a eurodollar deposit.

DEPOSITORY

An institution that holds securities for others.

DEPOSITORY INSTITUTION

A bank, thrift, or credit union.

DEPOSITORY TRANSFER CHECK

An unsigned, non-negotiable check used solely for moving money from a corpora­tion’s account at one bank to its account at another bank. Paper DTC’s have largely been replaced by ACH transactions.

DEPOSITORY TRUST & CLEARING CORP.

DTCC. Sometimes referred to as DTC. A registered securities depository, clearing, and settlement system, located in New York City. Similar in concept to Clearstream and Euroclear.

DEPRECIATION

An accounting concept that recognizes that certain types of assets (buildings, equipment, etc.) have finite lives, and the values thereof decrease every year. In the US, depreciation is considered an expense that may be deducted from the company’s income for tax purposes, thereby reducing its taxes.

DEREGULATION

A general term meaning the removal of restrictions on the banking business, particu­larly in terms of what banks can do and the interest rates they can pay, as well as what other kinds of organizations can perform banking-type services. See Bank, Gramm-Leach-Bliley Act, Non-Bank Bank.

DERIVATIVE

Derivative security. A security created (derived) from others, or created to meet a specific need or to have certain characteristics. For example, selling the interest payments from a treasury bond separately, rather than as part of the bond itself (stripping). Most derivatives can be classified either as options or forwards/futures.

DETACHMENT POINT

The overall percentage level of losses in a CDO at which a given tranche has been wiped out. See Attachment Point.

DEUTSCHE BÖRSE CLEARING

See Clearstream.

DIF

See Deposit Insurance Fund.

DILUTION

The reduction in the value of earnings or stockholders’ equity due to the issuance of additional shares of stock. Since the earnings (or stockholders’ equity) are divided up into more pieces, each piece is worth less, unless the earnings (or the stockholders’ equity) increase by at least a proportional amount.

DIP

See Debtor in Possession.

DIRECT SEND

A method of check clearing in which checks are sent directly by the bank in which they are deposited to the bank on which they are drawn, without any intervening banks.

DISCOUNT

A financial instrument selling for less than its face (i.e. maturity) value is said to be selling or trading at a discount, or below par (under 100).

Also used to denote debt instruments that do not have a coupon, but which earn their return by being issued at a discount, and redeemed at maturity at par. See CommercialPaper, Par, Premium, Treasury Bill, Zero Coupon Bond.

DISCOUNT BROKER

A stock broker who provides little or no investment advice or recommendations, only trade execution, and is therefore generally cheaper than a full-service broker.

DISCOUNT HOUSE

One of a small number of institutions in the UK with whom the Bank of England would deal when conducting its open market opera­tions, and which are essentially the UK equiv­alent of primary dealers in the US. Their role is not as important as it had been in the past due to the Old Lady’s use of other financial institutions in addition to the discount houses for that purpose.

DISCOUNT RATE

The rate at which a Federal Reserve bank will lend to banks who borrow at the Fed’s discount window.

Also, the rate on a discounted instrument such as a treasury bill.

DISCOUNT WINDOW

The formal mechanism by which a bank will borrow from the Federal Reserve.

DISCRETIONARY ACCOUNT

A type of investment management account in which the client has given the investment manager the right to make the investment decisions independently, without approval of each specific investment by the client. This is normally done only after detailed discussions about the client’s objectives. See Non-Discretionary Account.

DISHONOR

Refusal to pay a check upon presentation. See Protest.

DISINTERMEDIATION

A term used to describe funds flowing from the banking system (financial intermediaries) to non-bank investment alternatives, such as money market mutual funds.

DISTANT

In futures markets, refers to the futures contract which is furthest from final settlement. Sometimes called the back month. See Prompt.

DIVIDEND

That portion of a corporation’s profits that is distributed to stockholders, usually in cash, rather than being retained in the business. SeeRetained Earnings.

DIVIDEND DISBURSING AGENT

An institution that makes the actual divi­dend payments to stockholders of a corpora­tion (using funds previously furnished to it by the company) and which keeps the related records.

DJIA

The Dow Jones Industrial Average. A widely watched indicator of the average price of 30 stocks in the US. Similar in concept to the S&P 500.

DOCUMENTARY COLLECTION

A trade finance service provided by a bank in which the bank turns over title documents covering a shipment to an importer, in return for the importer’s payment (documents againstpayment, or D/P), or signed agreement to make a payment (documents against acceptance, or D/A). The payment (or signed agreement) would then be sent by the bank to the exporter.

DOCUMENTS AGAINST ACCEPTANCE

See Documentary Collection.

DOCUMENTS AGAINST PAYMENT

See Documentary Collection.

DOLLAR VALUE OF A BASIS POINT

See DVBP.

DORMANT

An account which has had no activity for a certain period of time. See Escheat.

DOUBLE-DATED

A UK term for a callable bond. The first of the two dates is the earliest call date, the second is the final maturity date.

DOUBTFUL

See Classified.

DOUGLAS AMENDMENT

An amendment to the Bank Holding Company Act that prohibits a bank holding company from acquiring a bank outside its home state, unless the other state allows it. SeeRiegle-Neal Act.

DOWN AND IN/OUT

See Barrier.

DOWNTICK

A securities trade made at a lower price than the previous trade. See Uptick.

DRAFT

A written order by one party to a second party to make a payment to a third party. As generally used in international trade, it is a written order to a bank to make a specified payment at some stated point in time to an exporter, to pay for goods. The order (i.e., the draft) imposes no liability on the bank unless the bank accepts it (agrees to make the payment). It then becomes a bankers accep­tance. The bank will be repaid by the importer, who had previously agreed to do so. These transactions arise under letters of credit. A draft is sometimes called a bill of exchange. See Check.

DRAWDOWN

The amount of loss incurred by an investment from high point to low point. Also, See Takedown.

DRIVE-BY

A securities offering announced and sold the same day.

DTC/DTCC

See Depository Trust& Clearing Corp.

DUAL INDEX NOTE

A type of structured note. A debt instru­ment where the interest rate paid and/or the redemption value depend not only on the level of two different indices (such as the 5 year and 30 year treasury indices), but on the difference between them as well.

DUE DILIGENCE

A detailed analysis of the economic and financial value of a company, usually done in conjunction with (and prior to) the under­writing, financing or acquisition of a company.

DUE FROM

See Nostro.

DUE TO

See Vostro.

DURATION

A measure of how sensitive the price of a financial instrument is to changes in interest rates. It takes into account the timing of the cash flows using present value techniques, and may be used by a bank as part of its asset/liability management program. Macaulay Duration is the weighted average number of periods to receive the present value of the cash flows; Modified Duration is the percentage change in the price of the instrument for a 1% change in interest rates. SeeConvexity, Immunization.

DVBP/DV01

Dollar value of a basis point. The amount by which the price of a bond changes for a one basis point change in its yield.

A stock market index, similar in concept to the S&P 500, but comprised of approximately 1000 stocks from approximately 20 countries in Europe, Australia, and the Far East.

EAR

See Earnings at Risk.

EARLY BIRD FEE

A fee paid to a participant in a loan syndica­tion for signing on by a certain date.

EARNING ASSET

An asset that earns a return. See Non-EarningAsset.

EARNINGS ALLOWANCE/CREDIT

A rate that a bank assumes it earns on a customer’s compensating balances. It allows the presumed earnings on those balances as a credit towards the cost of providing services to that customer, reducing what the customer might otherwise have to pay.

EARNINGS AT RISK

EaR. A risk management tool for attempting to determine, at some prespecified confidence level (typically 95 or 99%), the maximum amount a company could lose for given changes in the markets. Often used synonymously with Value at Risk.

EARNINGS PER SHARE

EPS. The amount of money a company makes, divided by the number of shares outstanding. Basic EPS uses the actual number of shares outstanding as the divisor, while diluted EPS includes additional shares that might be created due to outstanding stock options, convertible securities, and other possible dilutive actions.

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortization. A measure of the basic operating profitability of a company.

ECB

The European Central Bank, headquartered in Frankfurt.

ECN

See Electronic Communications Network.

E-COM

See Electronic Commerce.

ECP

See Electronic Check Presentment.

ECU

European currency unit. A weighted-average basket of European currencies. The forerunner of the euro which replaced it.

EDGAR

The SEC’s Electronic Data Gathering And Retrieval system for accessing electronically-filed security regulatory reports such as 10-K’s.

EDGE ACT CORPORATION

An exception to the McFadden Act restric­tion that a bank may not accept a deposit outside its home state. An Edge Act office, which generally contains “international” as part of its name, is a separately chartered bank that can do so, as long as those deposits relate to the international business of those depositors. Named for the congressman who spon­sored the legislation in 1919. The Riegle-Neal Act reduces the need for these offices. See Agreement Corporation.

EDI

See Electronic Data Interchange.

EFFICIENCY RATIO

Cost to income ratio. Overhead ratio. The percentage of a bank’s total revenues that are used up by expenses. It is a measure of the operating efficiency of the bank and, in general, the lower the better.

EFT

See Electronic Funds Transfer.

ELECTRONIC BILL PRESENTMENT AND PAYMENT

A form of electronic commerce whereby a merchant (generally through a bank or a third-party vendor) sends a bill to its customer electronically (rather than through the mail). The customer can then access it via the internet or the bank’s home banking network, and, while on-line, authorize the payment to be made. The intent is to eliminate the paper processing cycle.

ELECTRONIC CHECK PRESENTMENT

ECP. A method of clearing checks in which the data on the check is sent electronically between the banks, followed by the checks themselves, generally a few hours later. The intent is to detect return items faster.

ELECTRONIC COMMERCE

E-com. Doing business and exchanging orders, invoices, shipping instructions, payments, etc. electronically, including the internet, rather than by paper.

ELECTRONIC COMMUNICATIONS NETWORK

ECN. A securities market (stocks, bonds, etc.) that operates by matching buyers and sellers electronically via computer, rather than through a specialist or market maker.

ELECTRONIC DATA INTERCHANGE

EDI. A method by which businesses can send purchase orders, invoices, sales, shipping, billing and payment information to each other electronically, rather than by paper. The payments themselves may or may not be transferred along with the information.

ELECTRONIC FUNDS TRANSFER

EFT. Sending funds electronically rather than by paper (check). The term is sometimes used to denote consumer, rather than wholesale, electronic transfers. See ACH, Funds Transfer.

ESOP. A form of employee benefit plan. Consists of company stock that is distributed to its employees over time. The employees therefore become (part) owners of the company.

EONIA

Euro Overnight Index Average. Overnight borrowing rate in euros.

EPS

See Earnings Per Share.

EQUIPMENT TRUST CERTIFICATE

An investment secured by equipment such as an airplane. Payments for the use of the airplane made by the airline that issued the certificate will be used to pay the interest and principal on the certificate to the investors that bought the certificate (who therefore provided the money to buy the airplane in the first place). Title to the airplane will be held by a trustee.

EQUITY

See Stockholders’ Equity.

EQUITY KICKER

Generally used in venture capital. A provision attached to borrowed money that allows the lender to participate in the growth of the company by allowing the lender to convert some or all of the debt into the company’s stock, at some predetermined price. If the company does well, the stock will be worth more to the lender than the value of the debt.

EQUITY RATIO

The ratio of stockholders’ equity to total assets.

ERISA

Employee Retirement Income Security Act. A 1974 act of Congress that set minimum stan­dards for defined benefit pension plans, speci­fied that the assets of the plan are not company assets, but rather belong to the plan participants and their beneficiaries, and that there be a trustee to hold the assets on behalf of the participants.

ERM

See Exchange Rate Mechanism.

ESCHEAT

The passing of assets to the state after a certain period of account inactivity (on the order of 3-7 years, depending on the state). See Dormant.

ESCROW

Property (typically cash) deposited by one party with a second party (the escrow agent), to be released to a third party upon fulfillment of certain prespecified conditions.

ESOP

See Employee Stock Ownership Plan.

ESTATE

Generally, an interest in property. Often used to mean the assets of someone who has died. See Executor/Executrix.

ETF

See Exchange Traded Fund.

EUR

SWIFT currency code for the euro.

EUREX

A joint German-Swiss futures and options exchange. Trading is conducted electronically, rather than via the traditional open outcry.

EURIBOR

Euro Interbank Offered Rate. Similar to LIBOR, but with a much broader base of banks used for the computation of the rate.

EURO

EUR. €. As from January 1, 1999, the common European currency of the 11 country euroland. The individual national currencies were phased out in 2002, and additional countries have subsequently joined the euro.

EURO LIBOR

LIBOR, but for borrowings in euros.

EUROCHAPS

A funds transfer system for transferring euros, based in the UK.

EUROCLEAR

Euroclear Clearance System, plc. A securi­ties depository and settlement system, head­quartered in Brussels. Similar in concept to Clearstream and DTC.

EUROCURRENCY

Any currency that is on deposit outside of its home country. E.g., eurosterling represents pounds sterling deposited outside of the UK. The eurodollar is the most common of the eurocurrencies. A eurocurrency should not be confused with the euro.

EURODOLLAR

As the term is used today, any dollar that is on deposit in a bank outside of the US is considered a eurodollar. It need not be in a US bank, and it need not be deposited in Europe. The eurodollar market is a vast, unregulated market for the buying and selling of funds that are free from US reserve requirements and FDIC fees. Ultimately, all eurodollars must appear on the books of a US domiciled bank, but this is more for accounting purposes than anything else. See Eurocurrency.

EURONEXT

A set of exchanges for the trading of stocks, derivatives, and related instruments. Includes LIFFE and MATIF. Part of the New York Stock Exchange group.

EUROPEAN CURRENCY UNIT

See ECU.

EVENT OF DEFAULT

A specific event, listed in a bond indenture or loan agreement, upon whose occurrence a default has legally taken place. Such occur­rence usually permits legal action to be taken against the issuer or borrower. A grace period is sometimes allowed to permit the default to be cured.

EVENT RISK

The risk of an unforeseen event (such as a takeover of a company) affecting the credit rating of the company’s bonds.

EX DATE

The date on or after which the buyer of a stock is no longer entitled to the currently declared dividend. See Record Date.

EXCHANGE

A marketplace organized for the purpose of buying and selling securities. Historically has implied a physical location in which the trading takes place, although most newer exchanges are wholly electronic. See Over The Counter.

EXCHANGE RATE

The price of one currency stated in terms of another. See FX.

EXCHANGE RATE MECHANISM

ERM. An agreement by a number of Euro­pean countries to keep the values of their currencies within relatively narrow bands of each other. This was intended as a step towards monetary union, a single European currency called the euro. See Black Wednesday.

EXCHANGE TRADED FUND

ETF. A mutual fund-like investment vehicle which is traded continuously throughout the day as opposed to only at the end of the day as a traditional mutual fund.

EXECUTIVE MANAGING DIRECTOR

What the US banks are calling the exec­utive vice presidents in their merchant banking groups. See Managing Director.

EXECUTOR/EXECUTRIX

The person (man/woman) or institution charged with settling an estate. Called a personal representative in some states.

EXERCISE

Conversion of an option into a position in the underlying, or receiving, for cash-settled options, the in-the-money amount.

EXERCISE PRICE

Strike price. The price at which an option may be exercised.

EXOTIC CURRENCY

A currency that is traded infrequently, and only by specialists in that currency, rather than by all the major dealers.

EXPEDITED FUNDS AVAILABILITY ACT

See Regulation CC.

EXPENSE

Money paid out to acquire an asset or for a service being provided.

EXPENSE RATIO

That portion of a mutual fund’s average assets that goes to pay expenses (administra­tion, investment management, custody, etc.).

EXPORT LETTER OF CREDIT

See Letter of Credit.

EXTENSION RISK

The risk that a loan will be paid off later than expected (even though prior to the contractual maturity date). See Prepayment,Prepayment Risk, Prepayment Speed.

The purchase, at a discount, of a company’s accounts receivable. The factor assumes the collection risk, and the company is guaranteed to be paid.

FAIL

Most commonly used in securities transactions. It represents the failure of one party to deliver the securities sold, or of the other party to provide payment.

FAIR WEATHER BOND

See Range Floater.

FANNIE MAE

See Federal National Mortgage Association.

FASB

See Financial Accounting Standards Board.

FASB 115

FASB standard number 115, which deals with how a bank must value the securities in its investment portfolio.

FBE

See Fed Book Entry.

FCM

See Futures Commission Merchant.

FDIC

Federal Deposit Insurance Corporation. A quasi-governmental agency that insures domestic deposits at banks and thrifts up to $100M.

FED

The Federal Reserve. Variously used to indi­cate the Board of Governors of the Federal Reserve, the entire Federal Reserve System, or one of the 12 separate Federal Reserve banks.

FED BOOK ENTRY

FBE. A book entry securities system main­tained by the Federal Reserve, for holding US government securities on behalf of banks.

FED FUNDS

See Federal Funds.

FEDERAL AGENCY

Government agency. As generally used in financial markets, these refer to securities issued by US government agencies. Some are truly part of or guaranteed by the government (e.g., Government National Mortgage Associa­tion), while others are private institutions with no legal backing from the government (e.g., Federal National Mortgage Association).

FEDERAL FUNDS

Fed funds. Reserves that banks lend one another, usually on an overnight basis.

Also used to designate funds that can be used immediately by the recipient or holder (i.e., zero float), and are called available funds in this context. See Next Day Funds.

FEDERAL HOME LOAN MORTGAGE CORP.

FHLMC. Freddie Mac. A government spon­sored, stockholder-owned enterprise, chartered to promote the availability of funds for residential mortgages by buying residential mortgages from banks and thrifts.

FEDERAL NATIONAL MORTGAGE ASSN.

FNMA. Fannie Mae. A government spon­sored, stockholder-owned enterprise, chartered to promote the availability of funds for residential mortgages by buying residential mortgages from banks and thrifts.

FEDWIRE

A gross settlement funds transfer system, run by the Federal Reserve, used for moving money and, with fed book entry, for settling US government securities transactions for banks.

FEE-BASED SERVICE

A service that provides fee income to the bank. I.e., one whose profit is not a function of interest income and expense.

FERC

Federal Energy Regulatory Commission. An agency that regulates various aspects of the interstate natural gas, oil, and electricity business in the US.

The creation, combining, and packaging of financial instruments (generally including derivatives) in order to develop a new finan­cial instrument with specific price, yield, risk, and/or return characteristics.

FINANCIAL HOLDING COMPANY

See Gramm-Leach-Bliley Act.

FINANCIAL INDUSTRY REGULATORY AUTHORITY

FINRA. The regulator for brokers and brokerage firms in the US. Created in 2007 by merging the regulatory functions of the NYSE and the NASD.

FINANCIAL SERVICES AUTHORITY

FSA. The integrated financial services regulator in the UK. It is the successor to a variety of different regulatory agencies.

The period representing a company’s accounting cycle. Generally, but not always, corresponds to the calendar year.

FITCH

A credit rating agency.

FIXED ANNUITY

An annuity whose annual payments are constant. See Variable Annuity.

FIXED INCOME CLEARING CORP.

FICC. A subsidiary of DTCC that clears and settles US Government and mortgage-backed securities.

FIXED INCOME SECURITY

A fixed rate security (usually a bond or similar instrument), for which the interest income paid every year never changes, even if interest rates in the marketplace change. Fixed income securities give rise to interest rate risk.

FIXED RATE

An interest rate on a loan or a deposit that does not change over time. See Floating Rate.

FLAT

See Matched Book.

FLOAT

As a general term, it means uninvested or idle funds.

In terms of checks, it refers to uncollected funds, which are funds which have not yet become available for use.

FLOATER

Generally refers to a CMO whose interest rate goes up (or down) as market rates go up (or down), as opposed to being fixed. SeeInverse Floater.

FLOATING RATE

Variable rate or adjustable rate. A rate on a loan, bond or deposit that changes over time, as other rates change. The conditions under which the rate will float are spelled out in the underlying agreement. See Fixed Rate.

FLOOR

A capital markets product in which the writer or seller of the floor guarantees to the buyer that a given reference rate (interest, foreign exchange, or commodity) will not drop below a certain value. If it does, the writer will make payments to the buyer based on the difference in rates and the notional principal agreed to. See Cap, Collar, Forward Rate Agreement.

FLOOR PLAN

A loan to an auto dealer to finance its inventory of cars. The loan is tied to each specific car, and when a given car is sold, that part of the loan is to be repaid.

FLOOR RATE

The rate below which a floor will begin to make payments. See Cap, Cap Rate.

FLOWER BOND

Certain issues of US treasury bonds that would be accepted by the US government at face value (regardless of its market value) for the payment of estate taxes. These bonds are no longer created, although some older ones may still be available.

FNMA

See Federal National Mortgage Association.

FOOTSIE

See FT-SE.

FOREIGN EXCHANGE

See FX.

FOREX

See FX.

FORFAITING

Similar in concept to factoring, but generally longer term (often years), and typically covers overseas sales and the political risks associated therewith. A forfaiting house will buy longer term trade acceptances at a discount, if a bank has given its aval.

FORTUNE 500

Fortune magazine’s annual list of the 500 largest US companies. Often used to indicate any large company.

FORWARD CONTRACT

An over the counter agreement for the delivery of a commodity at some specified future time. The rate agreed to (the forward rate) is locked in and doesn’t change, even though delivery (settlement) may not take place for some time, and the value of the commodity may have changed in the interim. The intent is to protect against adverse price movements. See Futures Contract, SpotRate.

FORWARD RATE AGREEMENT

FRA. An over the counter capital markets product in which the writer or seller of the FRA makes a payment to the buyer if a given interest rate exceeds a certain value, and the buyer pays the seller if the rate is below. The amount paid is a function of the difference in rates and the notional principal agreed to. See Cap, Collar, Floor.

401(k)

A type of defined contribution plan. Named for the section of the Internal Revenue Code that governs these plans.

403(b)

A type of defined contribution plan. Named for the section of the Internal Revenue Code that governs these plans. They are available to employees of tax-exempt organizations and school systems.

404(c)

A set of minimum standards for defined contribution plans, that, if met by the plan sponsor, exempts the sponsor from liability for breach of fiduciary obligation to the plan participants. The standards specify the minimum investment choices that must be offered to the participants, among other features.

457

A form of deferred compensation plan for employees of state and local governments and non-profit organizations, similar in concept to a 401(k). Named for the section of the Internal Revenue Code that governs these plans. In a 457, however, as opposed to a 401(k), the funds are not set aside, but remain the property of the employer until paid out.

FRA

See Forward Rate Agreement.

FREDDIE MAC

See Federal Home Loan Mortgage Corp.

FREE-RIDING

An illegal practice of buying and then rapidly reselling securities without paying for them in the interim.

FRONT-RUNNING

The entering of a buy or sell order (for securities, commodities, FX, etc.) by a broker for their own account, ahead of (and with knowledge of) a large customer order to be executed. The intent is to profit from the market movement caused by the large order, and is generally considered illegal.

FSA

See Financial Services Authority.

FSLIC

Federal Savings and Loan Insurance Corporation. A quasi-governmental agency that insured domestic deposits at thrifts up to $100M. As part of FIRREA, the FSLIC’s function was transferred to the SAIF under the FDIC and the FSLIC was dissolved.

FT-A ALL-SHARES

The Financial Times Actuaries All-Shares index of 750 UK stocks, similar to but broader-based than the FT-SE. Similar in concept to the S&P 500.

FT-SE

Footsie. The Financial Times Stock Exchange index of 100 UK stocks. Similar in concept to the S&P 500. See FT-A All-Shares.

FULL-SERVICE BROKER

A stock broker who provides investment advice and recommendations, as well as trade execution, and is therefore generally more expensive than a discount broker.

FUNDAMENTAL ANALYSIS

An analysis of the prospects for a company and its stock based on a detailed examination of underlying economic conditions and the company itself. See Technical Analysis.

FUNDING

The process of creating liabilities of the appropriate mix to be used to support the assets of the bank. I.e., raising money.

FCM. Essentially, the equivalent of a stockbroker, but for futures contracts.

FUTURES CONTRACT

Futures. An exchange traded agreement to take or make delivery of a specified quantity of a commodity, at some future point in time, and at a price agreed at the time the contract was entered into, no matter what the actual price may be when delivery occurs and payment is made. Depending on the contract, settlement may be made in cash instead of the physical commodity. Similar in concept to a forward contract, with some important legal and operational differences. Key characteristics of some futures contracts are given near the end of this glossary.

FUTURES OPTION

An option to enter into a futures contract, with the contract price of the futures equal to the strike price of the option. A call converts, upon exercise, into a long futures position, a put into a short futures position.

FX

Foreign exchange. Forex. The process of buying one currency and paying for it with (i.e., selling) another.

The amount by which the delta of an option changes for a given change in the price of the underlying.

GAP

In terms of interest rates, the difference between assets and liabilities that are repriced (have their rates adjusted to current or near-current market rates) within a particular time period (rate sensitive assets minus rate sensi­tive liabilities for the period). The same concept can be applied to foreign currencies, and represents the difference between maturing foreign currency assets and liabili­ties. The size of the gap is related to the interest rate or FX rate sensitivity of the bank (how the bank’s profitability will be affected by changing interest or FX rates). Gap analysis is a technique using gaps to forecast the effect of changing rates on a bank’s profit. Spelled both as gap and GAP. See Match Funding, Mismatch.

GAP ANALYSIS

See Gap.

GBP

SWIFT currency code for the British pound.

GEARING

See Leverage.

GEMM

See Gilt-Edged Market Maker.

GENERAL OBLIGATION

See Municipal Bond.

GENOSSENSCHAFT

German cooperative bank.

GIC

See Guaranteed Investment Contract.

GILT

Gilt-edged security. Term for a UK government security.

GILT-EDGED MARKET MAKER

GEMM. A market-maker in gilts (UK).

GINNIE MAE

See Government National Mortgage Association.

GIRO

A settlement account. Generally used in overseas locations.

GLASS-STEAGALL ACT

Banking Act of 1933. An act of Congress that prohibited banks from engaging in the securities underwriting business. The Gramm-Leach-Bliley Act removed the restriction. See Section 20.

GLOBAL CERTIFICATE

A single certificate, representing all the outstanding securities of a company, usually deposited with a depository, which will then issue book-entry receipts against it.

GLOBAL CUSTODY

A custody service in which the securities held are issued globally. It is a way of providing centralized custody, servicing, and accounting for a portfolio no matter where the securities are issued.

GLOBEX

An electronic futures exchange. Part of the CME.

GMBH

Gesellshaft mit beschränkter Haftung. A form of private, incorporated (limited liability) company in parts of Europe.

GNMA

See Government National Mortgage Association.

GO

See Municipal Bond.

GOODWILL

The price paid above book value to acquire an asset in a cash transaction. It is an intan­gible asset which remains on the books of a company unless it is determined (via annual testing) to be “impaired,” which then would require it to be written down to its estimated value.

GOVERNMENT AGENCY

See Federal Agency.

GOVERNMENT NATIONAL MORTGAGE ASSN.

GNMA. Ginnie Mae. A government sponsored enterprise, chartered to promote the availability of funds for residential mortgages, by buying residential mortgages from banks. Obligations of Ginnie Mae are guaranteed by the US government.

GOVERNMENT SPONSORED ENTERPRISE

See GSE.

GRAMM-LEACH-BLILEY ACT

The Financial Services Modernization Act of 1999. This act removes most of the restrictions concerning the activities of banks and bank holding companies that are contained within the Bank Holding Company Act and the Glass-Steagall Act. In particular, it permits mergers among banks, insurance companies, and securities firms, and allows a new financial services firm called financial holding companies to offer banking services as well as underwrite insurance and securities.

GRANTOR

The creator of a trust.

GREEKS

Quantoid jargon for the various option pricing parameters which describe the behavior of an option’s price as factors such as time, volatility, and price of the underlying change. The common Greeks are delta, gamma, rho, theta, and vega.

GREEN SHOE CONCESSION

The option given to an underwriter of a security to purchase additional securities (generally up to 15% additional) at the offering price.

GROSS SETTLEMENT

A funds or securities settlement system in which each individual transaction results in the transfer of the gross amount of money or securities from one party to the other. See Continuous Linked Settlement, Net Settlement, Real Time Gross Settlement.

GSE

Government sponsored enterprise. Most commonly refers to FHLMC, FNMA, and GNMA.

GUARANTEED INVESTMENT CONTRACT

GIC. Typically a contract offered by an insurance company to retirement plans that will pay a guaranteed rate of interest for an agreed upon period of time, but will allow the principal amount to be withdrawn at face value without penalty, upon the occurrence of certain prespecified conditions (disability of a retiree, for example). Similar to a BIC.

GUARANTOR

One who agrees to make a payment if another does not.

GUIDANCE LINE

Guidance line of credit. An internal limit a bank sets for the maximum amount it will lend to a customer. The customer is not made aware of the amount of the line. See AdvisedLine.

A discount applied to the market value of collateral to allow for possible variations in its price.

HANG SENG

An index of stocks traded on the Hong Kong stock exchange. Similar in concept to the S&P 500.

HARD CURRENCY

A currency that tends to retain its value, and that people are willing to hold, such as the US dollar, yen, pound, euro, etc.

HEDGE

Reducing risk by entering into a transaction that will pay off if a certain (undesirable) event occurs. If the event does not occur, you are out the cost of the hedge. Health insurance is a form of hedging.

HEDGE FUND

Private investment vehicles which are exempt from regulation under the Investment Company Act of 1940. They are usually limited to less than 100 US investors, an unlimited number of foreign investors, and generally accept only large minimum investments (typically $250M and up). The term hedge as used in this context is somewhat misleading, since hedging is a risk-reducing technique. Hedge funds seek out risk (sometimes in very exotic ways by using various derivatives, short positions, leverage, etc.) in an attempt to create large returns.

HEDGE RATIO

The number of futures or options contracts needed to be bought or sold in order to perfectly hedge a position.

HELD TO MATURITY

See Investment Portfolio.

HENRY HUB

The delivery point for the NYMEX natural gas contract. It is located near Erath, Louisiana.

HERSTATT

Bankhaus Herstatt. See Settlement Risk.

HIGH NET WORTH INDIVIDUAL

HNWI. A wealthy person. Every bank will have its own definition of who will fall into this category.

HIGH WATER MARK

The highest price reached by a share for which a performance fee has been paid.

HIGH YIELD

See Junk Bond.

HLT

Highly leveraged transaction. See LBO.

HNWI

See High Net Worth Individual.

HOT MONEY

Investment funds that chase after the highest rate.

HOT RUN

See On The Run.

HR-10

See Keogh Plan.

HUB AND SPOKE

Also called master/feeder. Creation of a single mutual fund and its legal structure (the hub), with other mutual funds (the spokes) buying into it, eliminating the need for the spokes to go through the entire legal process to be created. Each spoke must have the same investment objective as the hub, but they can otherwise be different in terms of fee structure, name of fund, target investor population, marketing materials, advertising, etc.

International Banking Facility. A type of banking free-trade zone intended to let US banks compete for eurodollar business from the US, without having to resort to places like Nassau, Cayman Islands, London, etc. They are essentially eurodollar operations, but certain restrictions apply as to the kinds of transac­tions they may perform. They are generally exempt from reserve requirements, FDIC fees, and other banking regulations. This, coupled with the fact that they represent US country risk, make them (for some) an attractive place to deposit money.

IMAGE PROCESSING

Processing document or check images, rather than the physical documents or checks them­selves.

IMMOBILIZATION

Holding definitive securities in a deposi­tory’s vault, and issuing book entry securities against them.

IMMUNIZATION

An investment management technique which structures a fixed income portfolio in order to minimize the effect of changing interest rates on the overall portfolio return. The duration of the portfolio is set to equal the portfolio’s time horizon.

IMPLIED VOLATILITY

The volatility the underlying would have to have in order for an option to be priced as it is in the market. I.e., the option pricing model is used to derive the volatility given the price, rather than deriving the price given the volatility.

IMPORT LETTER OF CREDIT

See Letter of Credit.

IN PLAY

As used in mergers and acquisitions, means that a company has been publicly identified as a possible takeover target.

IN THE MONEY

A call (put) option in which the market price of the underlying is greater (less) than the strike price of the option. Exercise of the option would therefore result in a profit (ignoring the premium paid to acquire the option). See At The Money, Out Of The Money.

IN TRUST FOR

ITF. Used to indicate that assets are held on behalf of another.

INC

Incorporated. See Corporation.

INCOME

Profit. The excess of revenue over expenses.

INCOME STATEMENT

Also called a P and L (profit and loss). A statement of the income and expenses of a business for a particular period of time. SeeBalance Sheet.

INCORPORATED

Inc. See Corporation.

INDENTURE

A legal agreement between an indenture trustee and an issuer of debt securities (typi­cally a corporation or a municipal authority) that specifies the obligations of the issuer regarding payment of interest and principal, not selling or pledging assets, etc.

INDENTURE TRUSTEE

The entity (typically a bank) responsible for enforcing the provisions of an indenture, and protecting the rights of the holders of the secu­rities. Indenture trustee is a corporate trust function.

INDEX

An average of a group of securities, such as the S&P 500 index.

Also, in the natural gas business, refers to the average fixed price set during bid week for a given delivery point for gas to flow the next month.

INDEX ARBITRAGE

See Program Trading.

INDEX FUND MANAGEMENT

See Passive Investment Management.

INDEX-LINKED

An investment whose return is linked to the change in the value of some index over time.

INDUSTRIAL REVENUE BOND

IRB. A bond issued by a municipality to raise money to be lent to a company, often to build a factory. The company pays rent to the municipality in an amount sufficient to repay the principal and interest on the bond. The intent is to raise the money at tax-exempt rates.

INITIAL MARGIN

See Margin.

INITIAL PUBLIC OFFERING

See IPO.

INSOLVENCY

Inability to pay debts as they become due. Sometimes used to indicate bankruptcy.

INSTALLMENT LOAN

Generally used to indicate a consumer loan with periodic payments, such as a car loan.

An asset without tangible value, such as the value of a brand name, or goodwill.

INTER VIVOS TRUST

See Living Trust.

INTERCHANGE

A fee paid by the acquirer (the bank servicing a merchant who accepts a credit card), to the issuer (the bank that issued the card), to compensate the latter for its billing, collection, servicing, and funding costs. The fee is passed along to the merchant in the form of a discount on the value of the credit card charge.

INTEREST

A fee paid for the use of money.

INTEREST BASIS

Sometimes called basis. The method of computing the daily interest on a loan or deposit, given that you have the annual rate. For example, you could divide by 365, 366, or 360 to get the daily rate, depending on the basis used.

INTEREST COVERAGE RATIO

See Debt Service Ratio.

INTEREST ONLY

IO. A type of CMO in which the holder receives only the interest payments from the underlying pool of mortgages. See PrincipalOnly.

INTEREST RATE RISK

The risk that fixed interest payments from an investment would be less than market rates would generate today, due to a rise in interest rates. This would result in the investment being worth less than par value. If interest rates had declined, the investment would be worth more than par value. A floating rate would reduce or eliminate interest rate risk (and also the opportunity to profit from changes in rates). See Credit Risk.

INTEREST RATE SENSITIVITY

The sensitivity of a bank’s profit to changes in interest rates. The profit could go up, down, or stay the same as rates change, depending on the rate sensitivity of the bank. See Gap.

INTEREST TO FOLLOW

ITF. A method of computing interest on a loan. The interest is computed periodically (quarterly, for example), and then added to any principal to be paid, resulting in the total payment due, which will therefore be reduced as the principal is paid down.

INTERNATIONAL BANKING FACILITY

See IBF.

INTESTATE

To die without leaving a valid will.

INTRINSIC VALUE

The amount by which an option is in the money, if it is in the money, or zero otherwise. See Time Value.

INTRODUCING BROKER

IB. A broker with whom a customer places orders, but the actual trades, confirmations, accounting, maintenance of funds, clearing, settlement, and record keeping are handled by another firm, the clearing broker.

Services to institutions that generally involve providing financial advice, and being an intermediary, bringing together suppliers (lenders and investors) and users (borrowers and issuers of securities) of funds, rather than being a supplier directly. The objective is to generate fee income without assuming the credit risk. Some of the major investment banking services include underwriting, M&A, private placements, and corporate finance.

INVESTMENT COMPANY ACT OF 1940

The act of Congress that regulates mutual funds.

INVESTMENT GRADE

Securities given one of the top 4 ratings (AAA, AA, A, BBB/Baa) by a credit rating agency. See Non-Investment Grade.

INVESTMENT MANAGEMENT

Asset management. Investing and managing the money of individuals and institutions (corporations, pension funds, etc.). Investments are usually made in the stock and bond markets, for which the investment manager receives a fee.

INVESTMENT MANAGER

Investment advisor. One who performs investment management services for a fee.

INVESTMENT PORTFOLIO

In general, any set of investments.

As applied to banks, an account containing various securi­ties (usually US government and federal agen­cies, and municipal obligations) intended to provide liquidity and income for the bank. The portfolio would include securities held to maturity (those which the bank, when purchasing them, has the abilityand intent to hold to maturity), and those which are available for sale (which may be sold prior to maturity). As a result of FASB 115, the former are carried at cost, the latter are carried at fair (essentially market) value, with unrealized gains and losses being posted to stockholders’ equity. See Trading Account/Assets.

IO

See Interest Only.

IOU

I owe you. Colloquial expression for a document evidencing a debt.

IPC

Indice de Precios y Cotizaciones. An index of stocks traded in Mexico. Similar in concept to the S&P 500.

IPO

Initial public offering. The first time a company sells stock to the public. Due to the potential for rapid price increases, IPO’s are often in great demand.

IRB

See Industrial Revenue Bond.

IRREVOCABLE TRUST

A trust, which, once it is set up, can be neither terminated nor changed by its creator (grantor). See Revocable Trust.

ISDA

International Swap and Derivatives (formerly Dealers) Association. A group of swap dealers that has developed standard terminology and documentation for swaps and related transactions.

ISIN

International Security Identification Number. A 12 digit code used internationally to identify securities.

ISITC

Industry Standardization for Institutional Trade Communications. A worldwide securities trade group designed to develop global standards for securities transaction messages in order to facilitate STP.

ISSUED SHARES

The number of shares a company has actu­ally issued. See Authorized Shares, OutstandingShares.

Large companies with which banks do busi­ness. Sometimes called the Fortune 500.

LARGE VALUE TRANSFER SYSTEM

LVTS. Canada’s RTGS wholesale funds transfer system.

LAUNDRY LIST

See Regulation Y.

LBO

Leveraged buyout. A highly leveraged trans­action (HLT). Typically, a buyout of a company whereby the buyout group (management, investment/merchant bankers, etc.) puts up a small amount of its own money (equity) and leverages it by borrowing all the rest (from banks, by issuing junk bonds, etc.). If the buyout is ultimately profitable, the owners’ return is usually large, since they put up only a small amount of money. Due to the large amounts of borrowed money, LBO’s are unusually sensitive to increases in interest rates or downturns in the economy.

L/C

See Letter of Credit.

LDC

Lesser developed country. Generally used to refer to those countries having difficulty meeting their debt obligations.

LEAD MANAGER

The bank or investment bank which is primarily responsible for lining up other participants in a loan syndication or securities underwriting.

LEASING

A method of financing in which one party purchases equipment and “rents” the use of it to another. The economics of leasing is often dependent upon tax laws.

LEDGER BALANCE

The balance in a checking account per the books of the bank, recording all check deposits on the day they were made, without regard to float. See Collected Balance.

LEGAL LENDING LIMIT

Legal limit. The maximum amount of credit a bank may extend to any single borrower or group of related borrowers. Currently, a national bank’s unsecured legal lending limit is set at 15% of a bank’s total capital with a few minor adjustments. In some countries, it is called a loans to one borrower limit. See Overline Loan.

LENDING AUTHORITY

The maximum amount of credit a lending officer of a bank may extend upon his/her own authority to any borrower without further approval.

LETTER OF CREDIT

L/C. A means of substituting the credit of a bank for that of another party. A bank agrees to make a payment if certain terms and condi­tions (e.g., the presentation of specified docu­ments such as a bill of lading) are met. Usually, but not always, used in international trade transactions.

An import letter of credit is marketed by the bank to the importer; an export letter of credit is marketed to other banks, to get them to chose the first bank to confirm the L/C (for a fee).

LEVERAGE

The use of borrowed money (debt). Sometimes called gearing.

LEVERAGE RATIO

For a bank, the ratio of tier 1 capital to average tangible assets.

LEVERAGED BUYOUT

See LBO.

LIABILITY

That which a business owes (its debts).

Also, a source of a business’ money. See Asset,Stockholders’ Equity.

LIBID

London Interbank Bid Rate. The rate which banks in London will pay for dollar deposits. See LIBOR.

LIBOR

London Interbank Offered Rate. The eurodollar rate. Generally used as the base rate for eurodollar loans. Technically repre­sents the rate at which banks in London sell (lend) dollars to one another. See LIBID.

LIEN

A claim by a creditor against the assets of a debtor. A legal method used by a secured (collateralized) lender to assure that the collat­eral may not be sold by the borrower until the loan is repaid. A mortgage is a form of lien.

LIFFE

London International Financial Futures and Options Exchange. An exchange for the trading of futures and options. Part of Euronext.

LIGHT SWEET

See West Texas Intermediate.

LIMEAN

The average of LIBID and LIBOR.

LIMIT DOWN/UP

See Daily Limit.

LIMITED LIABILITY COMPANY

LLC. A form of business which combines the limited liability of a corpora­tion with the favorable taxation of a partner­ship.

LIMITED LIABILITY PARTNERSHIP

LLP. See Partnership.

LIMITED-SERVICE BANK

See Non-Bank Bank.

LINE FUNCTION

Those parts of a bank that have direct customer contact, such as tellers, relationship managers, sales personnel, etc. See Staff Function.

LINE OF CREDIT

See Advised Line, Guidance Line.

LIQUIDITY

The ease with which an asset may be turned into cash at little or no risk of loss (asset liquidity), or the ease with which funds may be raised in the various markets to which a bank may have access (liability liquidity).

LIVING TRUST

Inter vivos trust. A trust which takes effect while the creator (grantor) is alive. See Testamen­tary Trust.

LLC

See Limited Liability Company.

LLP

See Partnership.

LOAD

A sales charge imposed by some mutual funds to compensate the salesperson who sold it. The charge may be imposed when you buy the fund (front-end load), when you sell it (back-­end load, formally called a contingent deferred sales charge), or equally over a number of years (level load). Some funds have no such charges (no load funds). Studies have generally shown no difference in performance between funds that have these charges, and those that don’t.

LOAN AGREEMENT

A formal, legal contract between a bank and a borrower that stipulates the conditions under which the loan will be made, and under which the bank may refuse to make the loan.

LOAN FUND

A form of mutual fund that buys or makes commercial loans, rather than holding securi­ties in the form of stocks or bonds.

LOAN PRICING

All of the elements comprising income to the bank on a loan. At a minimum it will consist of the interest rate, and will usually contain additional compensation in the form of fees, compensating balances, etc.

LOAN PRODUCTION OFFICE

LPO. A bank office, usually geographically remote from the bank’s main marketing area, used to call on customers for the purpose of generating loans.

LOAN TO VALUE

LTV. The percentage of the value of an asset that a bank is willing to loan with the asset as collateral. The borrower must put up the remaining piece as equity.

LOANS TO ONE BORROWER LIMIT

See Legal Lending Limit.

LOCKBOX

A post office box into which payments due to a corporation will be mailed. A bank will periodically (throughout the day) empty the box, record and then send the payments to be collected, in order to speed up the collection process. Part of a cash management system.

LOCKED MARKET

In the futures market, when the contract is trading (or is bid or offered) at the daily limit price.

LOCK-UP

A period of time which must pass before investors can withdraw funds from investments previously made or before insiders can sell shares after an IPO.

LOMBARD

Lombard facility. The provision of credit to a bank (usually on a short-term, emergency basis) by a central bank, at a penalty rate (the Lombard rate).

LONG POSITION

A securities position in which one has an excess of purchases over sales, resulting in a net position of securities to be received. SeeShort Position.

LOOKBACK

An option with no early exercise. It pays the maximum payoff that would have been realized had the buyer of the option exercised at the optimal moment, with perfect foresight. These options are more expensive than plain vanilla options.

LOONIE

CAD. Canadian dollar. So-called because of the image of a loon (bird) on the one dollar coin.

MD. What the US banks are calling the vice presidents in their merchant banking groups. See Senior Managing Director.

MARGIN

As used in the stock and bond markets, margin is the amount of money an investor must put up in order to buy a security. The broker is permitted to lend you the rest. Currently, for marginable stocks, margin is 50% (you put up half, the broker lends you half). For treasury bills, margin is 10% and the broker can lend you 90%.

As used in the futures markets, margin is a deposit you make to cover potential losses in your position. You receive it back if you break even or make a profit.

Initial margin is the amount put up initially; maintenance margin is the amount below which the margin value may not fall; variation margin is the amount required to be furnished to bring the value of the margin to the required level.

MARGIN CALL

A requirement that an investor provide additional funds to cover a decline in value of an investment purchased using margin.

MARGINAL FUNDS RATE

A concept used by many banks to represent the cost of acquiring additional funds in order to make a new loan or investment. Generally, the new asset would have to earn at least the marginal funds rate in order to be minimally profitable. See Pool Rate.

MARK

To determine the market value of an asset. See Mark To Market.

MARK TO MARKET

An accounting practice of periodically valuing an asset at its current market value, and showing the difference between that value and the value the last time it was done as profit or loss (or sometimes as an increase or decrease in stockholders’ equity). The objective is to carry the asset at its market value.

In some circumstances, it also means to furnish (or release) collateral equal to the change in value.

MARKET CAP

See Capitalization.

MARKET-LINKED CD

A CD whose interest rate is dependent upon the change in some index (a stock market index, or a foreign currency rate), rather than being a simple fixed rate. Many market-linked CD’s guarantee return of 100% of the face value of the CD at a minimum.

MARKET MAKER

Dealer. One who makes a market in a particular commodity (stocks, bonds, oil, gold, FX, US treasury securities, baseball cards, etc.). Making a market means that the market maker agrees to buy or sell the commodity (takes a position) by posting price quotations (quotes) at which he will buy (the bid) or sell (the asked or offered). A market maker provides liquidity to the market by acting as a principal and risking his own money, and hopes to make a profit by doing so. See Broker.

MARKET NEUTRAL

A trading strategy that attempts to make money no matter in which direction the market moves. See Delta Hedging.

MARKET RISK

The risk that the price of an asset will change due to changes in market prices.

MARKET VALUE

The price at which an asset could be sold (as opposed to its cost value, the price paid for it).

Also, the value placed on an ownership interest in a business (share) by the marketplace. In this context, See Book Value.

MASTER CUSTODY

A trust service in which an institution acts as custodian for a number of related invest­ment portfolios, in order to provide a single focal point for all transaction activity.

MASTER/FEEDER

See Hub and Spoke.

MASTER TRUST

A trust service in which an institution acts as trustee for a number of related investment portfolios, in order to provide a way of viewing the entire set as an integrated whole.

MATCH FUNDING

The process of offsetting an asset by a liability of like maturity, repricing characteris­tics, and/or currency, in order to reduce or eliminate the interest rate or currency risk. A perfectly match funded asset has a zero gap. See Mismatch.

MATCHED BOOK

A portfolio of assets and liabilities that exactly offset one another, generally by matu­rity date, currency, or other risk factor. A matched book then would not have any of the underlying risk. For example, a purchase and sale of the same amount of the same currency to settle on the same day would be a matched book in that currency, if they were the only transactions in that currency. The value of the portfolio would be unaffected by changes in the value of the currency, since the net position is zero, flat, or square.

MATCHED SALE-PURCHASE

See Repurchase Agreement.

MATERIAL ADVERSE CHANGE

MAC. A clause often found in loan, acquisition, and other financial agreements that allows one party to modify terms or withdraw from the agreement if the others party incurs a “material adverse change” in its condition. What constitutes such a change is rarely defined.

MATIF

Marché à Terme International de France. A futures and options exchange in France. Part of Euronext.

MATURITY

The date on which final payment on a loan, deposit, or similar instrument is due.

MATURITY LADDER

Having a sequence of investments mature periodically, rather than all at once.

MBS

See Mortgage-Backed Security.

MCFADDEN ACT

The 1927 act of Congress that essentially prohibits interstate branching by banks. It lets each state choose how (or if) the banks in its state can branch. See Riegle-Neal Act.

MD

See Managing Director.

MERC

See Chicago Mercantile Exchange.

MERCHANT BANKING

This term has been used to mean different things. The most common usages include M&A (especially where the merchant bank invests some of its own money), corporate finance, stockbroking, investment manage­ment, and the various capital markets transac­tions.

MERGERS AND ACQUISITIONS

M&A. The business of companies merging or acquiring one another. From a bank’s perspective, it means assisting the process via advisory services and arranging or sometimes providing the financing as well.

MERVAL

An index of stocks traded on the Mercado de Valores de Buenos Aires S.A., the major stock exchange of Argentina. Similar in concept to the S&P 500.

MEZZANINE

In venture capital financing, it is the provision of funds to a company that is past the pure start-up phase, generally has a product, and needs money to develop it further and bring it to market. Mezzanine financing is senior to equity, but junior to pure debt, and typically has some sort of equity kicker, such as conversion into the company’s stock. Mezzanine financing is usually the last stage of financing prior to an IPO.

MICR

Magnetic ink character recognition. The funny-looking characters at the bottom of a check, which contain the information neces­sary to process the check. The MICR line is read by automatic processing equipment. A sample is given below.

The digits on the left represent the check number, those on the right (beginning with “863”) are the account number, and the nine digits in the middle are the bank’s unique routing number (sometimes called a transit/routing number, or routing/transit number).

The first four digits of the routing number (“0213”) represent the federal reserve district and branch within which the bank is located, the next four digits (“7061”) is the ABA (American Bankers Association) institution identifier (the ABA assigns these numbers), and the last digit (“6”) is a check digit, used to assure that the first eight have been correctly read. The dollar amount of the check would also be encoded in the MICR line.

The same information is found in the upper right hand corner of the check in fractional form. A sample is given below.

50-7061/0213

The three numbers represent respectively left to right the bank’s city or state, the bank’s identifier as above, and the federal reserve district and branch code. The city/state code contained in the fractional form of the routing number does not appear in the MICR line.

MIDDLE MARKET

That part of the business market which consists of companies that are larger than the mom and pop stores, but don’t quite make it to the Fortune 500 list.

MiFID

Markets in Financial Instruments Directive. A scheme in Europe to reduce or eliminate barriers (and costs) to trading across national borders by creating a single market and regulatory scheme. It requires brokers to execute client’s orders at the best price, regardless of where the market or exchange is located. Effective late 2007.

MISMATCH

The process, deliberate or otherwise, of creating an imbalance (gap) between selected parts of a bank’s balance sheet. If deliberate, it is done in order to create the opportunity for additional profit (and runs the risk of reduced profit or greater loss). Large, unintended mismatches should not occur in a well-run bank, as they expose the bank to risks of which it is not aware. Typical mismatches involve interest rates or currencies. See Gap, MatchFunding.

MITTELSTAND

Small and medium-sized businesses (Germany).

MOM AND POP

Used by banks to denote the very small businesses with which they may deal (the corner grocery, dry cleaner, etc.).

MONEY CENTER BANK

A major bank in New York, Chicago, Charlotte, and a small number of other cities that offers the full range of banking services, domestically and internationally. See Community Bank, RegionalBank, Supercommunity Bank.

MONEY LAUNDERING

The process of entering illegally obtained funds (drugs, gambling, etc.) into the banking system in such a fashion so as to mask their illegal origin.

MONEY MARKET

Collectively, those financial markets in which institu­tions raise money for periods of 1 year or less (CD’s, fed funds, repo’s, eurodollars, commercial paper, treasury bills). See Capital Market.

MONEY MARKET ACCOUNT

Money market deposit account. A bank account authorized by 1982 legislation as part of deregulation, to allow banks to compete with money market mutual funds. They allow the bank to pay any rate of interest it desires on insured bank deposits, have no reserves, and permit a limited number of payments to others to be made by check. The bank has the legal right to require prior notice of with­drawal (rarely exercised).

MONEY MARKET MUTUAL FUND

Money market fund. A mutual fund which invests in the money markets.

MONEY SUPPLY

A very loose definition would be the amount of money in circulation. In the US, there are a number of different definitions as to what constitutes money (for example, do money market accounts count towards the money in circulation), and therefore a number of different definitions of the money supply. The different definitions have names like M-1 (pronounced as the letter “M” followed by the number “one”), M-2, etc.

MONEY TRANSFER

See Funds Transfer.

MOODY’S

A credit rating agency.

MORAL OBLIGATION

An obligation of a company which is not legally binding, but which nevertheless may be honored. An example is where a parent company pays off the debt of a subsidiary, even though it is not legally obligated to do so.

MORTGAGE

A real estate loan whereby the lender retains an interest in the property as collateral until the loan is repaid. See Lien.

MORTGAGE-BACKED SECURITY

MBS. An asset-backed security representing an interest in payments made by a pool of mortgages. See CMO, Pass-Through, Securitization.

MORTGAGE BANKING

The process of originating, securitizing, selling, and servicing residential mortgages. The intent is to reduce risk and increase fee income.

MT. BELVIEU

Mont Belvieu, Texas. The delivery point for the NYMEX propane contract.

MT100/101/103

SWIFT message types used by banks for sending wire transfers.

MULTICURRENCY LOAN

A loan which could be drawn in one currency and, at the borrower’s option, repaid in another. The intent is to reduce or eliminate the currency risk to the borrower, as well as provide currency flexibility.

MUNI

See Municipal Bond.

MUNICIPAL BOND

A bond issued by a state or a political subdivision (county, city, etc.). Interest on muni’s is generally exempt from federal income taxes, and state and local taxes in the state in which they were issued. General obligation bonds (GO’s) are backed by the taxing power of the issuer, whereas revenue bonds are repaid solely from the revenue associated with a specific project (toll road, housing project, etc.).

MUTUAL FUND

Technically, an investment company. An investment vehicle generally offered by stock­brokers. Money put up by a number of investors is pooled and invested in various financial instruments. Each investor earns a return in proportion to the amount of money put up, less a management fee. Mutual funds are regulated in the US by the Investment Company Act of 1940.

National Automated Clearing House Associ­ation. An association that sets standards for ACH transactions.

NAIC

National Association of Insurance Commis­sioners.

Also, a credit rating system used by the NAIC.

NAKED

Uncovered. Writing (selling) a call option without owning the underlying. Naked call writing is generally considered speculation. See Covered.

NASD

See National Association of Securities Dealers.

NASDAQ

The stocks that are traded over the counter in the US. Also refers to the automated quotation system which reports prices of those stocks.

NATIONAL ASSOCIATION

See Regulator.

NATIONAL ASSN. OF SECURITIES DEALERS

NASD. Formerly the self-regulatory organization for stockbrokers in the US. See FINRA.

NATIONAL BANK

A bank chartered by the federal govern­ment, as opposed to one chartered by a state. See Regulator.

NATIONAL CREDIT UNION ADMINISTRATION

NCUA. The regulator for federally chartered credit unions. It also insures most credit unions.

NAV

See Net Asset Value.

NBE

National bank examiners, from the office of the comptroller of the currency. Sometimes called NBX. See Regulator.

NCUA

See National Credit Union Administration.

NEARBY

See Prompt.

NEGATIVE CARRY

See Carry.

NEGATIVE COVENANT

See Covenant.

NEGOTIABLE

A financial instrument which may be sold or transferred to someone else.

NEGOTIATED FUNDING SOURCES

See Purchased Funds.

NEGOTIATED UNDERWRITING

See Underwriting.

NERC

See North American Electric Reliability Corporation.

NET ASSET VALUE

NAV. The total market value of the assets of a mutual fund, divided by the number of fund shares that are outstanding. The NAV is not necessarily the same as the price per share of the fund.

NET DEBIT CAP

See Cap.

NET INTEREST INCOME

The difference (in dollars) between a bank’s interest income and its interest expense.

NET INTEREST MARGIN

Essentially, the difference (in percent) between the average rate earned on assets and the average rate paid on liabilities. Technically, it is net interest income divided by average earning assets.

NET SETTLEMENT

A funds transfer or securities settlement system in which individual transaction amounts are not exchanged between the parties, but rather only the net, generally at the end of the day or some other prespecified time interval. See Continuous Linked Settlement, Gross Settlement.

NET WORTH

See Stockholders’ Equity.

NETTING

The offsetting of amounts due between 2 (bilateral netting) or more (multilateral netting) parties so that only the net amounts due are actually paid. The intent is to reduce the volume and size of individual payments and therefore the risks.

NEXT DAY FUNDS

Funds that are not available for use until the next business day. Sometimes called clearing­house funds. See Federal Funds.

NIKKEI

The Tokyo Stock Exchange’s 225 stock equiv­alent of the S&P 500.

NO LOAD

See Load.

NON-ACCRUAL LOAN

A loan whose payment of interest is uncer­tain, and on which income is recognized only when cash is received. Any income already accrued and booked but not received must be reversed out when the loan is placed in non-ac­crual status. Sometimes called cash basis loans. See Accrual.

NON-BANK BANK

An organization that either accepts demand deposits, or makes commercial loans, but not both. More formally called limited-service banks, they can perform all the other functions of a bank, and represent a way around certain banking regulations. See Bank, Deregulation.

NON-BOOK TRANSFER

A transfer of funds or securities in which the two parties have accounts with different institutions, so a third party is generally needed to effect the transfer. See Book Transfer.

NON-DISCRETIONARY ACCOUNT

Advisory account. A type of investment management account in which the investment manager only recommends investments, and the client must specifically approve each choice. See Discretionary Account.

NON-EARNING ASSET

An asset which does not earn a return. For example, cash, or a bank’s buildings, as opposed to a loan.

NON-INVESTMENT GRADE

Securities given a rating below the top 4 ratings (AAA, AA, A, BBB/Baa) by a credit rating agency. Commonly called junk. SeeInvestment Grade.

NON-MONEY USE

An extension of credit by a bank that is not evidenced by an actual use of funds. The issuance of a letter of credit by a bank is an example.

NON-PERFORMING ASSET

Non-accrual loans, restructured loans, and ORE.

NON-QUALIFIED

A retirement plan which does not meet standards set by the Internal Revenue Service, and which therefore does not permit the company a tax deduction for contributions to the plan. See Qualified.

NON-RECOURSE

A loan sale to a third party where the seller (usually the original lender) is not liable to the buyer for any default by the borrower. SeeRecourse.

NORTH AMERICAN ELECTRIC RELIABILITY CORPORATION

NERC. An organization to improve the security and reliability of the North American power system.

NOSTRO

Nostro account. A demand (checking) or current account, maintained by one bank in another and denominated in a foreign currency, generally used for settling FX trans­actions, and making or receiving foreign payments. Sometimes called a due from account. See Vostro.

NOTCHING

An alleged threat by credit rating agencies to downgrade part of an issuer’s debt unless they are paid to rate all of the debt.

NOTIONAL PRINCIPAL

A hypothetical amount used to calculate payment flows in swaps and similar products.

NOVATION

The replacing of one or more contracts or obligations by a single new one. The old ones are legally extinguished, as if they never existed.

NOW ACCOUNT

Negotiable order of withdrawal. A type of bank account that lets you write “checks” against an account that pays interest. The bank has the legal right to require prior notice of withdrawal (rarely exercised), and therefore these are not legally considered demand deposits, on which interest could not be paid. Since the “checks” are technically not payable upon demand, they are in fact not checks but rather drafts. For all practical purposes, they look, act, and are accepted and processed as checks. Corporations are currently not permitted to hold NOW accounts.

Obligation Assimilables du Trésor. A long­-term French government security.

OBLIGOR

One who owes money. Generally, the borrower, although it could also be a guar­antor.

OCC

In securities, the Options Clearing Corpora­tion. A clearinghouse for the clearing of options and futures.

As applied to bank regulation, See Regulator.

ODD LOT

A trade of a security or commodity involving a quantity other than a round lot.

OECD

Organization for Economic Cooperation and Development. Essentially the major industrial­ized countries of the world.

OFF THE RUN

A US Treasury security of a given maturity other than the most recently issued of that maturity (the on the run security).

OFFERED PRICE

See Asked Price.

OFFICE OF THRIFT SUPERVISION

OTS. A regulator for thrifts.

OFFSHORE

Any financial, currency, or securities market that operates outside the regulation of a country is an offshore market with respect to that country.

OLD LADY

The Old Lady of Threadneedle Street. The Bank of England.

OLEM

See Other Loans Especially Mentioned.

ON THE RUN

The most recently issued US Treasury security of a particular maturity. Due to their liquidity, they are generally in greater demand than other guvvies of nearly identical maturity (off the run). Sometimes call hot run. See Off The Run.

OPAQUE

See Transparent.

OPEN END FUND

A mutual fund that will continually issue shares as investors request them. The fund can continue to grow in size. See Closed End Fund.

OPEN INTEREST

A term used in futures and options to denote the number of contracts that have been bought (or sold) that have not been offset (closed out) by the buyer or seller. It is an indication of the liquidity for a particular contract. The greater the open interest, the greater the liquidity.

OPEN MARKET OPERATIONS

The method by which the Fed and other central banks attempt to control the level of interest rates and/or the money supply in their respective countries by buying and selling government securities. SeeDiscount House, Primary Dealer, SVT.

OPEN OUTCRY

The traditional trading method for futures exchanges, where participants are face to face and trade via hand signals and voice, rather than electronically. Open outcry is largely being replaced by electronic trading.

OPERATIONAL RISK

The formal regulatory definition is “The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.“

OPTION

A financial instrument in which the seller or writer gives to the buyer, for a fee, the right to buy (call option) or sell (put option) a specified amount of the underlying commodity for a fixed price called the strike or exercise price (regardless of the market price at the time of purchase or sale), up to a certain date (American-style option) or on acertain date (European-style option).

ORDINARY SHARES

Common stock.

ORE/OREO

Other real estate (owned). Real estate which had been collateral for a loan that defaulted, and on which the bank foreclosed and now owns.

ORIGINATION

The process of making a loan.

ORIGINATOR

The sender of a funds transfer.

OTC

See Over The Counter.

OTHER LOANS ESPECIALLY MENTIONED

OLEM. A loan with potential weakness, but not sufficiently so as to warrant classification.

OTHER REAL ESTATE (OWNED)

See ORE/OREO.

OTHER TIME DEPOSITS

A time deposit for which no certificate has been issued. Rather, the depositor receives only a receipt or confirmation, and the principal and interest will be paid only to the holder as recorded on the bank’s books – they are not negotiable. See Certificate of Deposit.

OTS

See Office of Thrift Supervision.

OUT OF THE MONEY

An option whose exercise would result in a loss, and which therefore would not be exer­cised. See At The Money, In The Money.

OUT TRADE

A transaction in which the two parties have different understandings of the trade details.

OUTSOURCING

Farming out services to providers outside the bank who can generally do it cheaper than the bank can. Services typically outsourced include cafeteria, reproduction, messenger, and sometimes legal services and systems development.

OUTSTANDING SHARES

The number of shares of stock a company has issued, less the number of shares repur­chased by the company (treasury stock). It is the number of shares held by the public.

OVER THE COUNTER

OTC. A market where there is no face-to-face contact between the participants. It is a group of brokers and dealers who buy and sell various financial instruments (stocks, bonds, commodities, etc.) through an electronic or telephone network, rather than on the floor of an organized exchange, such as the New York Stock Exchange. See Exchange.

OVERDRAFT

A negative collected balance in a checking account (writing a check for more than your balance).

OVERHEAD RATIO

See Efficiency Ratio.

OVERLINE LOAN

The portion of a loan which is over a bank’s legal lending limit, and which it therefore would legally be unable to lend.

A takeover defense in which the acquisition target makes a takeover offer for the original acquirer.

PAR

Par value, face, or principal value, or value at maturity. When an instrument is worth its face value, it is said to be selling or trading at par or 100 (100% of face value). In this context, See Discount, Premium.

Also, the legal capital per share of a corporation. A corporation generally may not pay out dividends if doing so would reduce the book value of a share of stock below its par value. Most stock is sold at a price well above the par value, the difference going to surplus (capital surplus).

PARTICIPANT

A member of a loan or securities underwriting syndicate.

PARTICIPATION

The purchase of a portion of a loan. The purchaser assumes the credit risk (risk of default), and shares in the income on a pro rata basis. See Assignment.

PARTNERSHIP

A form of business organization in which the partnership itself pays no taxes, but each partner is taxed individually on his/her share of the partnership profits. The partners have unlimited personal liability for the oblig­ations of the partnership. A relatively new form of business organization, the limited liability partnership (LLP), mitigates this risk to some extent. See Corporation, Sole Proprietorship.

PASSIVE INVESTMENT MANAGEMENT

A form of investment management where specific investments are not chosen. Rather, the portfolio is designed to duplicate the structure and perfor­mance of a given index, such as the S&P 500. Investment selection is automatic, thereby reducing costs. Sometimes called index fund management. SeeActive Investment Management.

PASS-THROUGH

A type of asset-backed or mortgage-backed security in which the payments are passed through as received to the holders of the secu­rity. See Collateralized Mortgage Obligation.

PATH DEPENDENT

See Barrier.

PATH 15/26

Power transmission lines connecting Northern and Southern California. Path 15 sends power from north to south; path 26 in the reverse direction. Congestion often prevents excess power in one region from being sent to alleviate shortages in the other.

PAYABLE

See Accounts Payable.

PAYABLE-THRU DRAFT

A draft drawn on a non-banking company, which uses the payable-thru bank and its check clearing arrangements solely as a means of physically moving the draft from the bank to whom it is presented to the drawee company (the company on which it is drawn). It allows the company to examine the draft, which may then refuse payment or authorize the bank to make payment.

PAYING AGENT

The entity, usually a bank, which makes interest and principal payments to the holders of a bond, using money previously given to it by the issuer.

PAYMENT IN KIND

PIK. A security in which interest and sometimes principal payments that are due are paid not in cash but in further securities of the same type. See Toggle Note.

PAYMENT VS. PAYMENT

PVP. A form of settlement system in which the counterparties simultaneously exchange money. If either party is unable to complete its part of the transaction, the transaction in not consummated. See Delivery vs. Payment.

PAYMENTS SYSTEM

The means of moving money around the world. See ACH, CHAPS, CHIPS, EFT, Eurochaps, Fedwire,SWIFT, TARGET.

PAYOFF PROFILE

A graphical representation of the profit and loss characteristics of an option position.

PAYOR BANK SERVICES

Enhanced services provided to banks for a fee by Federal Reserve banks, such as early morning electronic transmission of MICR line data of checks that will be physically presented later in the day. The banks can then make this information available (for a fee as part of a controlled disbursement account) to their commercial customers, so they will have early notification of the checks that will clear their accounts that day.

PENSION

An agreement by an employer to pay to its employees a certain (usually periodic) amount upon retirement. See Defined Benefit, DefinedContribution.

PERFORMANCE LETTER OF CREDIT

A type of letter of credit whereby a bank agrees to make a payment if another party does not perform as agreed (usually in relation to a contract of some sort). See Standby Letter of Credit.

PERP

A perpetual security. A debt security with no maturity date. Interest is paid forever, but the principal is never repaid.

PERSONAL REPRESENTATIVE

See Executor/Executrix.

PFANDBRIEFE

Bonds issued in Germany backed by residential mortgages. A form of mortgage-backed security.

PIBOR

Paris Interbank Offered Rate. Similar to LIBOR, but in Paris.

PIK

See Payment In Kind.

PIP

The smallest price change in an FX quote.

PIPE

See Private Investment in Public Equity.

PIT

The actual physical arena in which trading takes place, via open outcry, on a futures exchange. Much of pit trading is being replaced by electronic trading.

PLACING

Deposit placing. A deposit made by one bank in another bank. See Taking.

PLAN SPONSOR

One who sets up a retirement plan, typically the employer.

PLANNED AMORTIZATION CLASS

PAC. A tranche or tranches of a CMO intended to provide a stable average life over a wide range of prepayment speeds. See TargetedAmortization Class.

PLC

See Public Limited Company.

PO

See Principal Only.

POINT

A fee paid to a mortgage lender and which is part of the total cost of the mortgage. One point equals 1% of the amount of the mortgage loan amount.

POOL RATE

The rate at which a bank gives credit to an internal department for bringing in funds, and the rate at which it charges a department for the use of those funds. See Transfer Pricing.

PORTFOLIO

A holding of investments such as stocks, bonds, currencies, etc.

POSITION TAKING

Assuming a long or short position in an investment in the hopes of profiting from price changes.

POUND

See Sterling.

POWER

Electricity.

POWER SWAP

A swap in which the payments to be made are based not on a difference in rates, but rather on the difference in rates squared.

PREFERRED STOCK

See Stock.

PREMIUM

The price paid to buy an option.

Also, when an instrument is worth more than its face (i.e., maturity) value, it is said to be selling or trading at a premium, or above par (over 100). See Discount, Par.

PREPACK

A bankruptcy term meaning that the company itself has prepared (prepackaged) a plan to enter and then leave Chapter 11 bankruptcy with the prior approval of its creditors, rather than going through the sometimes lengthy and complex legal proceedings to have its reorganization plan approved by the court and the creditors.

PREPAYMENT

Most commonly, paying off a loan earlier than its contractual maturity date.

Also, to make a payment on a loan in addition to the amount due at a particular time.

PREPAYMENT RISK

The risk that a loan will be paid off early, prematurely terminating the lender’s cash flow. Most commonly arises in residential mortgage loans. See Extension Risk, Prepayment Speed.

PREPAYMENT SPEED

The speed with which a pool of loans will prepay. Most commonly used in conjunction with mortgage-backed securities. Prepayment speed depends in large part on changes in the levels of interest rates. See PSA.

PRESENT VALUE

A method for valuing investments that takes into account the timing of the cash flows. The further out in time that money is to be received, the less value it has today. Present value is the mathematical opposite of compounding.

PRESENTMENT POINT

The location at which a bank will accept checks drawn on its accounts.

Primary government securities dealer. In the US, one of a small number (21 at this writing) of banks, brokers, and investment banks that buy and sell US government securities with the Fed when the Fed conducts its open market operations. Their UK equivalents are called discount houses, and in France, SVT, Spécialistes en Valeurs du Trésor.

PRIMARY MARKET

Whenever securities are being sold by the original issuer, they are being sold in the primary market. See Secondary Market.

PRIME RATE

In the past, has generally meant the rate charged by a bank to its most creditworthy commercial borrowers. It could therefore be expected to be the bank’s lowest lending rate. Due primarily to the growth of the commercial paper and eurodollar markets, banks have been forced to lend money to their better corporate customers at rates below prime, in order to keep their business. Many banks today call it a reference rate, with no connotation of creditworthiness, and may lend money at rates at, above, or below prime (or the refer­ence rate).

PRINCIPAL

The amount of a loan or deposit due at maturity (par), exclusive of any interest to be paid.

Also, when one acts on one’s own behalf, for one’s own account, rather than for the account of others.

Or, one who employs an agent. See Broker,Market Maker.

PRINCIPAL ONLY

PO. A type of CMO in which the holder receives only the principal payments from the underlying pool of mortgages. See Interest Only.

PRIVATE BANK

In Switzerland, a bank whose legal form of organization is generally a partnership or sole proprietorship (as opposed to the more common corporate form), and whose partners or owners have unlimited personal liability for the debts of the bank. These banks generally provide private banking services.

PRIVATE BANKING

The provision of banking services to high net worth (wealthy) individuals. See Private Bank.

PRIVATE EQUITY

Private investments in public or non-public (primarily) companies.

PRIVATE INVESTMENT IN PUBLIC EQUITY

PIPE. Purchase of equity in a public company via a private transaction, often at a discount to the current market price.

PRIVATE PLACEMENT

Raising money in a way that bypasses the public securities (stock and bond) markets. The securities are sold to a small number of private investors, rather than the public. A private placement reduces the costly fees asso­ciated with a public offering, speeds the process, and avoids having to reveal publicly what might be sensitive financial information. The securities generally may not be offered for immediate resale. See Rule 144a.

PRIVATELY HELD COMPANY

See Publicly Held Company.

PROFIT

Net income. What’s left over for a company and its owners after all expenses and taxes have been accounted for.

PROGRAM TRADING

Sometimes called index arbitrage. Comput­erized trading of stocks, stock indices such as the S&P 500, and options and futures contracts on those indices, to take advantage of small differ­ences in what are essentially identical commodities. Program trading, due to the size and speed of the trades, are thought by some to magnify price changes in the markets.

PROJECT FINANCE

Financing large infrastructure projects (transportation, power, communications, etc.) via direct financing of the project itself, rather than the project sponsor. A primary objective is to keep the project debt off the sponsor’s balance sheet.

PROMPT

Nearby. In futures markets, refers to the futures contract which is closest to final settlement. See Distant.

PROPRIETARY

As used in mutual funds, it refers to a fund that a bank makes available to its customers for which the bank itself is the investment advisor.

Trading activities of a bank in which the bank is trading for its own account, rather than trading on behalf of or in response to its customers.

PROSPECTUS

A detailed document required to be distrib­uted prior to any public securities offering in the US and certain other countries. It describes the offering, the company, and its finances in detail. A red herring (so-called because of red printing on the cover) is a preliminary prospectus issued before the offering price has been determined, containing most, but not all, of the required information. See Registration.

PROTEST

The formal procedure for presenting an item (such as a check) for payment and receiving written notice of dishonor (that it will not be paid). It then forms the basis for legal action against the maker (writer) of the check.

PROVISION FOR CREDIT/LOAN LOSSES

A reduction of current income, in order to build up the reserve for credit/loan losses.

PROXY

The means by which shareholder voting rights are transferred to another party.

PSA

Payment Speed Assumption. A mathematical model of MBS prepayment speeds published by SIFMA.

PT

Perseroan Terbatas. Indonesian for “inc.”

PTE

Private. Non-public company.

PTY

Proprietary. Non-public (private) company.

PUBLIC LIMITED COMPANY

PLC. The UK equivalent of “incorporated.”

PUBLICLY HELD COMPANY

One whose shares may be bought and sold in the various public markets, as opposed to a privately held company, where the shares are generally held only by a few investors, and are not usually freely available for purchase.

PUMP AND DUMP

An illegal practice of generating false publicity about a company in an attempt to drive up the price of the company’s shares, which are then sold at a profit.

PURCHASED FUNDS

Also called negotiated funding sources, or managed or purchased liabilities. Sources of funds for a bank that are rate sensitive (and therefore expensive) as well as risk sensitive. Tend to have little loyalty to the bank. Consists primarily of federal funds, commercial paper, and large time deposits (over $100M). Some­times called “hot money.” See Core Deposits.

PURCHASED LIABILITIES

See Purchased Funds.

PUT

The right of the holder of a debt security to require the issuer to pay it off prior to its contractual maturity date.

Also, a type of option in which the seller or writer gives to the buyer, for a fee, the right to sell a specified amount of the underlying commodity for a fixed price called the strike or exercise price (regardless of the market price at the time of sale), up to a certain date (American-style option) or on a certain date (European-style option). See Call.

PUTTABLE BOND

A bond which the holder (investor) has the right, under certain conditions, to require the issuer to pay off early. See Callable Bond.

A retirement plan which meets certain stan­dards set by the Internal Revenue Service. Qualified retirement plans permit the company an immediate tax deduction for contributions to the plan, but the income of the plan is not taxed until withdrawn by the participants in the plan. See Non-Qualified.

QUALIFIED INSTITUTIONAL BUYER

QIB. Essentially, a large institution that is eligible to purchase Rule 144a securities.

QUANTO

Guaranteed exchange rate contract. An option denominated in a foreign currency in which the writer of the option guarantees the rate at which foreign currency profits (if any) will be converted back into the holder’s own currency.

A type of structured note. A debt instru­ment which pays a higher rate of interest than would otherwise be available if some index remains between two values, but nothing other­wise. Sometimes called a fair weather bond.

RAROC

Risk-adjusted return on capital. A method of assigning capital to bank activities such that riskier activities are assigned greater capital, meaning such activities must earn a higher return to make it worthwhile investing in that activity in the first place. Similar in concept to risk-based capital. Sometimes referred to as RORAC, return on risk-adjusted capital.

RCPC

See Regional Check Processing Center.

REAL ESTATE INVESTMENT TRUST

REIT. A pooled investment vehicle that invests in real estate. Similar in concept to a mutual fund.

REAL TIME GROSS SETTLEMENT

RTGS. A funds or securities transfer system in which all payments are made individually as each transaction occurs, rather than netted at the end of some predetermined time period. See Continuous Linked Settlement, Gross Settlement, Net Settlement.

RECEIVABLE

See Accounts Receivable.

RECORD DATE

The date on which one must be recorded on the books of a stock’s transfer agent in order to receive the most recently declared dividend. See Ex Date.

RECOURSE

A loan sale to a third party where the seller (usually the original lender) remains liable to the buyer for any default by the borrower. See Non-Recourse.

RED HERRING

See Prospectus.

REFERENCE RATE

Sometimes called a base rate. The rate used as the basis for computing the interest rate on a floating rate loan. Common reference rates are the prime rate, the trea­sury bill rate, and LIBOR/EURIBOR.

REGIONAL BANK

Medium-to-large size banks that offer many (but not all) of the possible banking services to their customers. There are also a growing number of superregional banks, representing interstate combinations of regional banks, which operate in a number of states, and offer direct competition to money center banks in the superregionals’ market areas. See Commu­nity Bank, Riegle-Neal Act, Supercommunity Bank.

REGIONAL CHECK PROCESSING CENTER

RCPC. Facilities, usually in areas geographi­cally removed from major cities, maintained by the Fed for purposes of accepting and processing checks drawn on or received by banks in those areas, in order to speed up the collection of the checks.

REGIONAL COMPACT

Banking regulations prohibited a bank holding company in one state from acquiring a bank in another. An exception was allowed if the state of the bank to be acquired permitted it. Groups of states that mutually permitted such acquisitions were called regional compacts. The Riegle-Neal Act eliminated the need for these compacts.

REGISTERED

A security whose owner has been recorded on the books of the issuer or its agent. See Bearer.

REGISTERED REP

See Registered Representative.

REGISTERED REPRESENTATIVE

Registered rep. An individual licensed to sell securities. See Series 6, 7, 63.

REGISTRAR

An institution that maintains the list of a company’s bondholders, or, in the case of stocks, audits the transfer agent to prevent overissuance of shares.

REGISTRATION

The process through which all securities to be sold to the public in the US must go. The offering must be filed with the SEC detailing financial information about the company, its management, use of the proceeds, etc. The information is then published in a prospectus. The intent is to allow investors to have the information necessary to make an informed decision about the investment. Many countries have similar requirements.

REGULATION CC

A regulation of the Board of Governors of the Federal Reserve System that covers return item processing, and implements the Expe­dited Funds Availability Act, which places limits on the length of time a bank can hold funds that were deposited by check into an account.

REGULATION D

A regulation of the Board of Governors of the Federal Reserve System that sets reserve requirements.

REGULATION DD

Truth in Savings Act. TISA. A regulation of the Board of Governors of the Federal Reserve System that specifies how compound interest rates on savings accounts are to be computed, sets standards as to what constitutes a free account, etc.

REGULATION EE

A regulation of the Board of Governors of the Federal Reserve System that permits banks to offset (net) their obligations to each other, so that one bank only owes the difference to the other.

REGULATION K

A regulation of the Board of Governors of the Federal Reserve System that governs the overseas activities of US banks, and the US activities of foreign banks.

REGULATION Q

A regulation of the Board of Governors of the Federal Reserve System that, until March, 1986, set the maximum interest rate that banks could pay on deposits. That part of Regulation Q has been phased out, although Reg Q still pro­hibits the payment of interest on demand deposits.

REGULATION Y

Called the laundry list. A regulation of the Board of Governors of the Federal Reserve System that specifies the permissible activities for bank holding companies.

REGULATION Z

Truth in Lending Act. A regulation of the Board of Governors of the Federal Reserve System that requires banks to reveal the APR of a loan.

REGULATOR

Every bank is regulated and examined by one or more regulatory agencies, although each bank has a single primary regulator. At this writing, for commercial banks, the primary regulatory agency can be the OCC, the Office of the Comptroller of the Currency (national banks, which contain “national,” “national association,” or “NA” in their name), the Federal Reserve Board (bank holding companies and state-chartered banks which are members of the Federal Reserve System), the Federal Deposit Insurance Corporation (non-member, FDIC insured state-chartered banks), or a state banking department (non-member, non-FDIC insured state-chartered banks).

Financial holding companies (newly authorized by the Gramm-Leach-Bliley Act) have the fed as their primary regulator.

Thrifts are regulated by the OTS (Office of Thrift Supervision), often along with the state and the FDIC, while credit unions are regu­lated by the National Credit Union Adminis­tration or the state.

REINSURANCE

Laying off part of the insurance risk, along with part of the insurance premium.

REIT

See Real Estate Investment Trust.

RELATIONSHIP MANAGER

RM. The person in a bank who is respon­sible for coordinating all of the bank’s business with a particular customer.

RELIT

Règlement et Livraison des Titres. A stock clearing and settlement system in France, operated by Sicovam.

REMIC

Real estate mortgage investment conduit. A form of CMO.

REMOTE DISBURSEMENT

A cash management practice, not widely used today, that consisted of writing checks on a bank as geographically removed from the recipient as possible, in order to maximize the time it would take the check to clear, and therefore the time the money stayed in the check writer’s account. See Controlled Disburse­ment Account.

REP OFFICE

Representative office. A banking office that may not directly engage in the banking busi­ness (such as taking deposits or making loans), but which may act in a marketing or liaison capacity for the head office.

REPO

See Repurchase Agreement.

REPRESENTATIVE OFFICE

See Rep Office.

REPRICING

The periodic resetting of the interest rate on a loan or deposit.

REPRICING INTERVAL

The frequency with which loan repricing takes place.

REPURCHASE AGREEMENT

Repo. Security sold under agreement to repurchase. An agreement by one party to sell securities (almost always but not necessarily government or government agency obligations) for a period of time, and to buy them back at the end of that period for a previ­ously agreed upon price. The securities repre­sent collateral for the other party, who has made a secured loan and has therefore engaged in a reverse repo (security purchased under agreement to resell, resale agreement, or matched sale-purchase agreement). In some markets, the repo/reverse termi­nology is interchanged.

RESALE AGREEMENT

See Repurchase Agreement.

RESERVE ACCOUNT

An account in a central bank in which a bank’s reserve requirement is held. Some central banks pay interest on the reserve balance (generally at a below market rate). In the US, interest is not paid on these funds.

RESERVE FOR CREDIT/LOAN LOSSES

An allowance for bad debts on a bank’s balance sheet, in order to recognize the fact that not all loans will be fully repaid. It has the effect of showing the loans at their estimated repayment value, rather than the value at which they were made. Also called the allowance for loan (or credit) losses. See Provi­sion For Credit/Loan Losses.

RESERVE REQUIREMENT

Regulation D requires banks to set aside a percentage of certain types of deposits in a non-earning account at a Federal Reserve bank, reducing the amount of loans or investments they can make, and therefore the potential profit of the bank. Vault cash also counts towards reserves. Other countries have similar requirements, and some central banks do pay interest on reserves.

RESIDENTIAL MORTGAGE

A loan to an individual to buy a house.

RESIDUAL FUEL OIL

See Bunker.

RESPONDENT

See Correspondent.

RESTRUCTURED LOAN

A loan where the bank has agreed to reduce the interest rate, lengthen the maturity, or both, in order to enable the borrower to make the (reduced) payments. The alternative is gener­ally bankruptcy for the borrower.

RETAINED EARNINGS

That portion of stockholders’ equity which represents all the accumulated earnings of the company that have been kept in the company, rather than having been paid out as dividends.

RETURN ITEM

A check being returned without payment by the bank on which it was drawn, most commonly due to insufficient funds (i.e., a bounced check). See Regulation CC.

REUTERS

An on-line information service and market data provider that furnishes quotes on financial instruments to its subscribers.

REVENUE

All the money that comes into a company. A manufacturing company, for example, receives most of its revenue from selling its products. For a bank, interest on loans and fee income are the primary sources of revenue.

REVENUE BOND

See Municipal Bond.

REVERSE REPO

See Repurchase Agreement.

REVOCABLE TRUST

A trust which can be changed or terminated at any time by its creator. See Irrevo­cable Trust.

REVOLVING CREDIT

A form of lending by a bank evidenced by a formal loan agreement, representing the bank’s legal obligation to lend the money if the terms of the agreement are met. Typically the funds are borrowed and repaid (in full, part, or not at all) at the borrower’s option continuously over the course of a (usually) 3 year period. Similar in concept to the cash advance feature on a bank charge card. Any outstanding balance at the end of the period (i.e., at maturity) must be fully repaid on that day, and the credit expires. A convertible revolving credit permits payoff of the outstanding balance over a period of years like a term loan, rather than all at once.

RGV

Relit Grande Vitesse. A clearing and settlement system for fixed income securities in France, operated by Sicovam.

RHO

The amount by which the price of an option changes for a given change in the risk-free rate.

RIEGLE-NEAL ACT

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. This law essentially permits nationwide banking in the US. It generally does away with the restric­tions on interstate banking contained in the Bank Holding Company Act, the Douglas Amendment and the McFadden Act. There are a few exceptions.

RIGHT

A security issued by a company allowing stockholders the ability to purchase additional shares, often at a price below the market, for a short period of time. The rights may some­times be traded in the marketplace. See Warrant.

RISK-ADJUSTED ASSETS

The total assets of the bank, after multi­plying each asset by the risk weighting speci­fied by the risk-based capital requirements.

RISK ASSETS

Assets which entail a risk of loss to the bank. Examples of risk assets are loans and state and local government securities, while cash and US treasury securities are not considered risk assets. Other things being equal, a bank with more risk assets would require greater risk-based capital.

RISK-BASED CAPITAL

A concept relating the amount of capital a bank has or needs after adjusting for the riski­ness of its assets. A bank with a high percentage of US treasury securities will require lower risk-based capital than one with fewer of those securities and a higher propor­tion of loans. Risk-based capital requirements went into effect on December 31, 1990. See Capital Adequacy, Risk Assets, RiskWeighting, Total Risk-Based Capital, Basel II.

RISK-FREE RATE

The interest rate one could earn with no credit risk. In the OECD countries, the rate on a country’s government securities is generally considered the risk-free rate in that country.

RISK MANAGEMENT

A technique used by banks and other companies to measure the various risks they are taking (credit, interest rate, currency, country, etc.), to assure that the risks are within preset limits.

RISK RATING

­A numerical grade given by a bank, generally to corporate borrowers, reflecting the riski­ness to the bank of lending to that company. Usually is a scale of 1 – 9 or 1 – 10 (sometimes even more categories), with 1 being the least risky.

RISK WEIGHTING

The weighting factor (a number between zero and 100%) given to various asset classes to reflect their relative risk. Zero is the least risky weighting (assigned to, among others, cash and US government and most other OECD government securities), while a factor of 100% would be applied to most types of loans. It is part of a bank’s risk-based capital computations.

RM

See Relationship Manager.

ROA

Return on assets. A measure of the prof­itability of a bank, equal to income/average assets. Other things being equal, the higher the ROA, the greater the profit for a given size bank. Generally measured in basis points. See ROE.

ROADSHOW

Meetings held with potential investors by a company issuing securities and its underwriters to promote the securities.

ROE

Return on equity. A measure of the prof­itability of a bank (equal to income/average stockholders’ equity) which shows how well the stockholders are being compensated for the risk they have taken in buying the bank’s stock (whether or not they got their money’s worth). See ROA.

ROLLOVER

The process of extending the maturity of a loan, deposit, or similar instrument when it becomes due, by creating a new loan or deposit to “take over” when the old one matures. The old one is actually paid off, and a new one is set up.

Also, transfer of funds between retirement accounts in such a fashion so as to continue to qualify for tax deferral.

RORAC

See RAROC.

ROUND LOT

The normal minimum unit of trading for a given commodity. For stocks in the US, a round lot is 100 shares. See Odd Lot.

ROUTING/TRANSIT NUMBER

See MICR.

RTGS

See Real Time Gross Settlement.

RULE 144a

An exception to the restriction that privately placed securities may not be resold. They may be resold or traded between QIB’s.

The S&P 500 market index. A widely watched indicator of the average price of 500 stocks in the US. Sometimes referred to as the S&P. See DJIA.

SA

Société Anonyme, Sociedad Anónima. Various equivalents of “incorporated.” See PLC.

SAFEKEEPING

A service in which a bank holds a customer’s securities in its vault, and delivers them upon request.

Also, as related to check clearing, holding the checks at the bank rather than returning them to the customer at the end of the month. In this context, See Truncation.

SAIF

Savings Association Insurance Fund. The successor to the FSLIC, created by FIRREA, to insure thrift institutions. The SAIF and the BIF were merged in 2006 to create the Deposit Insurance Fund.

SALLIE MAE

See Student Loan Marketing Association.

SAME DAY SETTLEMENT

Paying for an item the same day it is presented for payment.

SAMURAI BOND

Yen denominated bond issued in Japan by a non-Japanese issuer.

SARBANES-OXLEY

Sarbox. A law passed in 2002 in response to various accounting scandals that attempts to increase the reliability of public companies’ financial statements by requiring chief executives and chief financial officers to certify the adequacy and effectiveness of internal controls and the accuracy of the financial statements. There are many other provisions.

SARBOX

See Sarbanes-Oxley.

SARL

Société àResponsabilité Limitée. A form of limited partnership.

SAVINGS ACCOUNT

An account for which there is no stated maturity date, but for which the bank may require prior notice of withdrawal. They generally do not permit checks to be written against the account. See NOW Account.

SCRIPTLESS

A security issued in book-entry form.

SDN BHD

Sendirian Berhad. Malaysia. Indicates a company with a limited number of shareholders (essentially privately held).

SEC

The Securities and Exchange Commission, which regulates securities transactions, buyers, sellers, and exchanges in the US.

SECONDARY MARKET

After securities have been sold by the orig­inal issuer (the primary market), they may be traded (bought or sold) in the secondary market, which consists of buyers and sellers other than the original issuer.

SECTION 20

The part of the Glass-Steagall Act that prevented bank holding companies from being “engaged principally” in under­writing securities. See Gramm-Leach-Bliley Act.

SECTOR FUND

A mutual fund which invests in a particular sector of the economy, such as biotechnology, computer makers, chemicals, finance, etc.

SECURED LOAN

A loan where the lender has collateral.

SECURITIES ACT OF 1933

Requires disclosure of information and registration of securities which are to be publicly sold.

SECURITIES EXCHANGE ACT OF 1934

Created the SEC to ensure that the require­ments of the Securities Act of 1933 were carried out.

SECURITIES INVESTORS PROTECTION CORP.

SIPC. A corporation in the US that protects brokerage house customers against failure of the brokerage house. It guarantees the value of cash (up to $100M) and securities (combined limit with cash of $500M) in brokerage accounts. It does not protect against a decline in the value of the customers’ investments due to price changes in the market.

SECURITIES LOAN

A loan of securities for a (generally) short period of time, usually to allow the borrower to cover a fail or short sale. The securities lender earns a fee for the loan.

SECURITIZATION

The process of making a security out of an asset so that it can be sold or traded. The objective is to increase the liquidity of the asset and to generate fee income. Common securitized assets include residential mortgage loans, automobile loans, credit card receivables, student loans and commercial loans. See Asset-Backed Security, Collateralized Bond/Debt/Loan/Mortgage Obligation, Mortgage-­Backed Security.

SECURITY

Anevidence of ownership (e.g., shares of stock) or of indebtedness (a bond or deben­ture).

Also, collateral.

SEDOL CODE

Stock Exchange Daily Official List. A code used to identify securities (UK).

SELL SIDE

In the stock and bond markets, refers to the sellers of these securities, primarily the large brokers, banks, and investment banks. See Buy Side.

SENIOR

A debt security whose holders are paid interest or principal before holders of other classes of securities, such as subordinated.

SENIOR MANAGING DIRECTOR

What the US banks are calling the senior vice presidents in their merchant banking groups. See Executive Managing Director.

SENSEX

A index of stocks traded on the Bombay Stock Exchange. Similar in concept to the S&P 500.

SERIAL BOND

A set of bonds with staggered maturity dates, issued under a single indenture.

SERIES 6

An exam, administered by the NASD, that must be taken and passed in order for an indi­vidual to be licensed to sell mutual funds and variable annuities.

SERIES 7

An exam, administered by the NASD, that must be taken and passed in order for an indi­vidual to become a registered representative (licensed to sell stocks, bonds, mutual funds, and other securities).

SERIES 63

An exam, administered by the NASD, that must be taken and passed in order for an indi­vidual to be licensed to sell securities in certain states. Called uniform state law or blue sky exam.

SERVICING

The handling of the administrative and operational aspects of a loan. As used in mort­gage lending, the servicing agent receives the principal and interest payments from the borrower and remits them to the lenders, receives tax, insurance, and other escrow payments and disburses them appropriately, does the accounting, prepares and sends annual statements to the borrowers, etc.

SETTLE/SETTLEMENT

In funds transfers, check clearing, and secu­rities transactions, the process of making payment (in the latter case, in exchange for the securities).

In estates, the process of distributing the estate assets to the beneficiaries.

SETTLEMENT DATE

The date on which a transaction will settle. See Trade Date.

SETTLEMENT FINALITY

A characteristic of certain funds transfer systems that funds are or will be available to make a payment and that once made, the payment may not be revoked.

SETTLEMENT RISK

Delivery risk. A risk involved in buying and selling which arises when one party to a trans­action delivers value (cash, securities, etc.) and the other doesn’t complete its side of the transaction. It is due to the non-simultaneous nature of most settlement procedures. Some­times called Herstatt risk, after the bank involved in the first major occurrence of this risk in 1974. See Continuous Linked Settlement, DVP, PVP.

SGX

See Singapore Exchange.

SHARED NATIONAL CREDIT

An agreement among banking regulators that any bank loan of $20MM or more and made jointly by 3 or more banks would be evaluated at one of the banks with the resulting classification applying to all banks in the credit.

A way in which a company can complete registration of securities to be sold, but not actually sell them until market conditions are favorable.

SHELL

Shell branch. Typically means a bank branch in another country whose only function is to provide the legal ability to operate in that country. No physical presence is maintained, and transactions are generally initiated (and records maintained) by other offices of the bank.

SHORT AGAINST THE BOX

A short sale of a stock already owned.

SHORT POSITION

A securities position in which one has an excess of sales over purchases, resulting in a net position of securities to be delivered. SeeShort Selling, Long Position.

SHORT SELLING

Selling something you don’t own. Typically, the commodity to be sold is borrowed and then sold. Since it’s been borrowed, it must ultimately be replaced. If the price declines, you can purchase it on the open market and cover the short sale by replacing what was borrowed with what you just bought, making a profit on the difference between the higher selling price and the lower purchase price. The risk is that the price goes up, and the short sale must be covered at a higher price than the sale price.

SHORT SQUEEZE

When securities are sold short, they must ultimately be purchased and delivered. If the securities are in limited supply in the market­place, or if those who have them are willing to sell them only at premium prices, then the short seller is forced to pay whatever the market demands, creating a short squeeze. They are sometimes done delib­erately.

SIBOR

Singapore Interbank Offered Rate. Similar to LIBOR, but in Singapore, and for Singapore dollar borrowings, rather than US dollars.

SICAV

Société d’Investissement à Capital Variable. The French equivalent of a mutual fund.

Segregation of a fund’s illiquid assets to protect the fund against redemption requests.

SIFMA

Securities Industry and Financial Markets Association. A trade group formed by the merger of the Bond Market Association (BMA) and the Securities Industry Association (SIA).

SIGHT

A payment to be made upon presentation or demand.

SIGHT ACCOUNT

An account where payment is to be made at sight (upon presentation or demand). A variation of a checking account.

SIMEX

See Singapore Exchange.

SIMULATION

A computerized method of analyzing a bank’s future performance under varying conditions. A model of the bank’s balance sheet is constructed, certain assumptions are made, and the computer generates the income statement. Usually thousands of runs are made, using probabilistic assumptions about interest rates. Simulation can also be used to determine the price of an option or a complex investment like a CDO.

SINGAPORE EXCHANGE

SGX. Stock Exchange of Singapore and the Singapore International Monetary Exchange (SIMEX). An exchange for the trading of stocks, futures, and options.

SINKING FUND

Periodic payments made to a special fund to be used to pay off bonds.

SIPC

See Securities Investors Protection Corporation.

SIV

See Structured Investment Vehicle.

SLMA

See Student Loan Marketing Association.

SMART CARD

A multifunction plastic card. In its simplest form, value (i.e., money) is loaded onto it from a bank account via an ATM, which may then be used as cash anywhere the appropriate reader has been installed. Prepaid telephone cards are a form of smart card. See Credit Card, Debit Card.

SOFT CURRENCY

A currency that people are not willing to hold, due to unstable economic or political conditions in the country, high inflation, etc.

SOLE PROPRIETORSHIP

A form of business organization in which the owner is legally the same as the company, and who therefore has unlimited personal liability for the obligations of the company. See Corporation, Partnership.

SOLVENCY OPINION

A statement by an independent party that a proposed financing or acquisition of a company will not leave it insolvent. Usually required to protect the lenders or the acquiring group of investors from subsequent lawsuits.

SOURCE OF FUNDS

A way of raising money. For a bank, deposits are generally the principal source of funds.

SOVEREIGN RISK

See Country Risk.

SPAC

See Special Purpose Acquisition Company.

SPARKASSE

A German savings bank.

SPC/SPV

See Special Purpose Corporation.

SPECIAL

In repo, a security that is highly desirable and whose owners can pay a sub-market rate on the cash collateral received.

SPECIAL MENTION

See Other Loans Especially Mentioned.

SPECIAL PURPOSE ACQUISITION COMPANY

SPAC. An entity generally set up for the sole purpose of raising money for acquisitions.

SPECIAL PURPOSE CORPORATION/VEHICLE

SPC/SPV. A corporation set up for the sole purpose of raising money by issuing commer­cial paper or notes backed by a specific set of assets (such as accounts receivable), rather than by the credit of the company creating the SPC/SPV. Sometimes called a conduit.

SPECIALIST

The individual or firm through whom all transactions are effected in a traditional stock exchange, such as the New York Stock Exchange. They match buyers and sellers, but are required to buy or sell for their own portfolio if there is an imbalance in buy/sell orders. There has been a dramatic decline in their numbers due to electronic trading. See Electronic Communications Network.

SPECULATION

Taking large (sometimes excessive) risks, in the hope of making large profits.

SPLIT

Stock split. A distribution of additional shares of stock in a company to existing share­holders on a pro-rata basis. In a 2 for 1 split, for example, each shareholder would receive one more share for each share held. In this case, the market price of the stock would normally be half of what it was before the split, reflecting the fact that the company is the same, but it’s been broken up into twice as many pieces as before.

SPOT PRICE

See Cash Price.

SPOT RATE

A rate for the delivery of foreign currency on a spot basis. In the FX business, spot usually means delivery two business days from the trade date. See Forward Contract.

SPREAD

Generally means the difference between the rate earned on an asset and the cost of funding it. Also, the difference between any two rates. Typically measured in basis points.

In options trading, means a position estab­lished by buying one contract and selling a similar one.

In futures trading, means a position estab­lished by buying one contract and selling another with a different expiration date, or on a different commodity. See Crack, Crush.

SPRING-LOADING

Putting a lot of expenses and charges in an income statement prior to a change in management or an acquisition to make future periods’ income look better.

SQUARE

See Matched Book.

SSI

See Standing Settlement Instructions.

STAFF FUNCTION

Bank support functions. Those areas of a bank that generally do not have direct customer contact, such as human resources, operations, audit and accounting, information technology, etc. See Line Function.

STANDBY LETTER OF CREDIT

A type of letter of credit whereby a bank agrees to make a payment if another party does not. Similar in concept to a guarantee. See Performance Letter of Credit.

STANDING SETTLEMENT INSTRUCTIONS

SSI. A database containing information about counterparties and their banks or broker/dealer accounts into which payments or transfers will be made. In the absence of instructions to the contrary, the SSI information will be used. A key component of STP.

STATE-CHARTERED BANK

A bank chartered by one of the states, as opposed to one chartered by the federal government, a national bank. See Regulator.

STATEMENT OF CONDITION

See Balance Sheet.

STERLING

GBP. £. Pound sterling. Cable. The UK unit of currency.

STOCK

Shares of ownership interest in a corporation, or a security representing such ownership. Common (or ordinary) shares entitle stockholders to vote and to a proportional interest in the earnings and the growth of the value of the business. Preferred shares generally pay a fixed dividend, regard­less of how the business may grow, and usually carry no voting rights. Preferred shareholders get their dividend before common shareholders get any, and, in the event of liquidation of the company, preferred shareholders are paid off before the common shareholders get to share in any residual value. See Stockholders’ Equity.

STOCKHOLDERS

The owners of a corporation. Also called shareholders.

STOCKHOLDERS’ EQUITY

Shareholders equity. The money invested and left in the corpora­tion by the owners (shareholders or stockholders), equal to the difference between assets and liabilities. It is what the business would theoretically be worth if all the assets were turned into cash, and then all the debts (liabilities) of the busi­ness paid off. Other things being equal, the greater the stockholders’ equity, the safer the company from the creditors’ viewpoint, since stockholders have no fixed claim against the company and never have to be repaid. They only get whatever is left over, if anything. It is therefore viewed as a cushion or protection against losses. Also called net worth.

STP

See Straight-Through Processing.

STRADDLE

An options strategy consisting of buying both a call and a put with the same strike price and expiration date. The combination will make money if the underlying moves a certain amount in either direction.

STRAIGHT-THROUGH PROCESSING

STP. A method of organizing transactions and entering data so that the data is entered only once, at the initiation of a transaction, and all subsequent processing is done using the original data. The intent is to minimize errors caused by continual re-entry of data into different processing systems, speed up the process, and reduce costs.

STRAITS TIMES

An index of stocks traded on the Singapore Exchange. Similar in concept to the S&P 500.

STRANGLE

An options strategy consisting of buying both a call and a put with different strike prices but the same expiration date. The combination will make money if the underlying moves a certain amount in either direction.

STRIKE PRICE

See Exercise Price.

STRIPPING

The process of removing coupons from a bond and selling each individually as a zero coupon bond.

STRUCTURED FINANCE

A form of securitization. Creating investments (asset-backed securities) based on cash flows from a set of underlying assets rather than the creditworthiness of the creator of the structured vehicle. The cash flows are divided into tranches with differing risk/return profiles. Investors choose whichever tranche suits their requirements.

STRUCTURED INVESTMENT VEHICLE

SIV. A form of structured finance. Generally, funds are raised via short or medium term borrowings (commercial paper and notes) and invested in longer term assets. The resulting spread is paid to the investors according to a predetermined sequence, resulting in tranches of varying risks and returns.

STRUCTURED NOTE

A type of derivative security. Typically a debt instrument constructed to have specific (and generally unusual) risk/return character­istics. It will often pay a higher rate than would otherwise be available under certain condi­tions, but less (often much less) under other conditions. See CDO, Dual Index Note, Range Floater.

STUDENT LOAN MARKETING ASSN.

SLMA. Sallie Mae. A corporation that promotes the avail­ability of funds for student loans, by buying student loans from banks.

A debt security whose holders are paid interest or principal after holders of other classes of securities, such as senior.

SUBSIDIARY

A company partially or wholly owned by another.

SUBSTANDARD

See Classified.

SUBSTITUTE CHECK

See Check 21.

SUPERCOMMUNITY BANK

A term sometimes used to indicate a small or medium-size bank that is very profitable due to some niche product or specialized service they offer.

SUPER-NOW ACCOUNT

A variation of a NOW Account. The legal distinction between the two no longer exists, although some banks still maintain it.

SUPERREGIONAL BANK

See Regional Bank.

SUPER SENIOR

A CDO tranche with a very high attachment point and expected to have very low risk.

SUPPLEMENTARY CAPITAL

See Tier 2 Capital.

SUPPORT CLASS

See Companion Class.

SURPLUS

Capital surplus. Also called additional paid­-in capital. The excess of the price of a share of stock sold by a company over the par value of the share. If par value is $1, and the company sells the stock for $10, $9 goes to surplus.

SUSPENSE ACCOUNT

An account into which banks will temporarily put a transaction when they don’t know where the transaction actually belongs (often due to missing information). An item should not remain in a suspense account for any length of time.

A capital markets transaction whereby two parties (none, one, or both of whom might be a bank) exchange a series of payments. Each needs to make a particular type of payment, but would rather make the type of payment the other has to make, so they make each other’s payments. Common types of swaps involve interest rates (interest rate swaps), curren­cies (currency swaps), commodities (commodity swaps), equities (equity swaps), or combinations. The payments to be made are based upon the various rates or indexes involved, as well as the notional principal.

SWIFT

Society for Worldwide Interbank Financial Telecommunication. A telecom­munications network, owned by banks, headquartered in Belgium, and used for sending standardized messages between banks, most often in different countries. Commonly used for funds transfers, as well as letters of credit, documen­tary collections, FX, securities transactions, confirmations, etc.

SWIFT CODE

See BIC.

SWIFT CURRENCY CODE

A three character code used by the SWIFT system to represent the currency of the trans­action (USD, GBP, CHF, etc.). A list of common SWIFT currency codes is at the end of this glossary.

SYNDICATION

A loan made collectively by a group of banks. Each bank will lend a pro rata share of the total, and assume the corresponding share of the income and risk. Each bank is a member of the syndicate, or a participant in the loan.

SYNTHETIC SECURITY

A security created by combinations of other securities (often including derivatives) whose financial and risk/return characteristics repli­cate those of another.

SYSTEMIC RISK

The risk that a bank will fail owing money to others, causing each of them to fail as a result, and so on, creating a worldwide domino effect.

Securities industry terminology that a trade must be settled on the 1st (next), 3rd, or 5th day after the trade date. In the US, T+3 is the standard since late 1995 for stocks (changed from the T+5 in effect for many years). The shorter the settle­ment period, the lower the risk of loss due to one party failing to settle because of changes in the value of the security between transac­tion and settlement. Planning for T+1 in many global markets is in the very early talking stages at this writing. STP is a prerequisite to implementing T+1.

TAC

See Targeted Amortization Class.

TAKEDOWN

To increase a loan. E.g., the borrower took down $1MM of his loan. Also called draw­down.

TAKING

Deposit taking. A deposit taken from one bank by another bank. See Placing.

TAC. Similar to a PAC, but which protects only against prepayment, not extension risk. A reverse TAC protects against extension, but not prepayment risk.

TAURUS

A stock clearance and settlement system in the UK that was scrapped in 1993 due to poor design and cost overruns, and was replaced by CREST.

TAX CREDIT

A reduction in taxes owed on a dollar-for dollar basis. See Tax Deduction.

TAX CUSHION

The ability of an institution to use tax-­exempt income. Since tax-exempt income gives a lower return (in exchange for not having to pay taxes on the income), an institution that pays no taxes anyway (non-profit organization, for example) has no tax cushion.

TAX DEDUCTION

A reduction in taxable income, resulting in a reduction in taxes equal to the tax deduction times the tax rate. See Tax Credit.

An analysis of the prospects for a company and its stock based on certain quantitative indicators, such as the stock’s historical price movements, and various balance sheet and income statement ratios. See FundamentalAnalysis.

TELEGRAPHIC TRANSFER

TT. See Funds Transfer.

TELEMARKETING

Selling products via telephone call centers.

10-K

A detailed, annual financial statement that companies that sell securities to the public in the US are required to file with the SEC. See EDGAR.

10-Q

A quarterly financial statement that compa­nies that sell securities to the public in the US are required to file with the SEC. See EDGAR.

TENOR

The original length of time before the final payment on a loan, deposit, or similar instru­ment is due.

TERM LOAN

A form of lending by a bank evidenced by a formal loan agreement, representing the bank’s legal obligation to lend the money if the terms of the agreement are met. Typically the funds are disbursed all at once, and principal repayments are in equal monthly, quarterly, or semiannual installments over a maximum period of approximately 7 years. See Revolving Credit.

TESOBONO

A Mexican government security, with repay­ment of principal linked to the US dollar.

TESTAMENTARY TRUST

A trust which takes effect only upon the death of the creator (grantor). Also called a trust under will. See Living Trust.

TFM

See Transaction Flow Monitor.

THE CITY

The City of London. The financial district of London.

THETA

The amount by which the price of an option changes for a given change in time to expira­tion of the option.

Supplementary capital. Under the risk-based capital guidelines, consists of the reserve for loss losses (with certain limitations), certain types of subordinated debt, and certain other instruments.

TIER 3 CAPITAL

Market risk capital. The additional risk-based capital banks must have to compensate for market risks.

TIME DEPOSIT

A deposit with a stated maturity date, as opposed to, for example, a demand deposit, which is repayable upon demand of the depositor. In the US, a time deposit legally must have a minimum maturity of 7 days. A CD is a form of time deposit.

TIME VALUE

The part of an option premium that pays for the time remaining until expiration of the option, as opposed to paying for any intrinsic value the option may have.

TIMES INTEREST EARNED

See Debt Service Ratio.

TISA

Truth In Savings Act. See Regulation DD.

TOGGLE NOTE

A corporate note or bond whose interest can be paid either in cash or in additional notes (PIK), at the issuer’s option.

TOMBSTONE

An advertisement, usually after the fact, describing a specific financial event (issue of stock or bonds, merger or acquisition, etc.). Generally done only for public relations purposes.

TOTAL CAPITAL

See Total Risk-Based Capital.

TOTAL RISK-BASED CAPITAL

Total capital. Total tier 1, 2, and 3 capital with certain limitations and deductions.

TOTAL RISK-BASED CAPITAL RATIO

BIS (Bank for International Settlements) ratio. Cooke ratio. The ratio of total risk-based capital to the risk-adjusted assets of the bank.

TRADE ACCEPTANCE

A draft whose payment at maturity has been assured by a non-banking company, such as a manufacturer. See Bankers Acceptance.

TRADE DATE

Transaction date. The date on which a trans­action actually takes place. See Settlement Date.

TRADE FINANCE

A general term meaning the different ways in which a bank can finance international trade (imports and exports). Primarily consists of letters of credit, international funds trans­fers, docu­mentary collections, bankers acceptances, and foreign exchange.

TRADING

Buying and selling currencies, commodities, securities, etc., intending to make a profit. Time frames tend to be short (minutes, hours, or days) rather than long (weeks, months, or years), although this is not always the case.

TRADING ACCOUNT/ASSETS

An account on a bank’s books containing various securities (US treasury, federal agency, municipal obligations, and others) intended to be managed to make money for the bank. The profits generally come from underwriting fees, position taking, market making, and trading in securities. See Investment Portfolio.

TRANCHE

The French word for slice. A part of a loan or security, or parts of a pool of loans or securi­ties having common or similar rate, maturity, and/or risk characteristics.

TRANSACTION DATE

See Trade Date.

TRANSACTION FLOW MONITOR

TFM. A system to coordinate the information flows necessary to implement STP for post-trade securities processing.

TRANSFER AGENT

An institution that maintains the stock­holder records of a corporation. See Registrar.

TRANSFER PRICING

An internal mechanism by which a bank charges one department for the use of its funds (for making loans, for example) and gives credit to another department for supplying those funds (through deposits, for example). Usually, the branches are net suppliers of funds, and the commercial lending department is a net user of funds. SeePool Rate.

TRANSFER RISK

The risk a bank runs by making a loan to a borrower in a currency other than the home currency of that borrower. The transfer risk arises if the borrower is unable to generate enough of the foreign currency to repay the loan, even though it might well have enough of its own currency.

TRANSIT/ROUTING NUMBER

See MICR.

TRANSPARENT

A market in which information about prices and activity is generally widely and immediately available, as opposed to an opaque market.

TREASURY

The department of a bank that is respon­sible for the day-to-day management and purchasing of the bank’s funds.

TREASURY BILL

A short-term borrowing (1 year or less) by the US government. An investor purchases a T-bill at a discount from par, and is repaid at par by the government. Treasury bills currently are issued with a 4 week, 3 month (13 week), or 6 month (26 week) original issue maturity. Other countries have similar instruments.

TREASURY BOND

Interest-bearing (coupon) obligations issued by the US government, with an original issue maturity of over 10 years – 30 years.

TREASURY NOTE

Interest-bearing (coupon) obligations issued by the US government, with an original issue maturity of 2 – 10 years.

TREASURY STOCK

Shares of stock which had previously been issued and were in the hands of the public, but which the corporation had repurchased. Trea­sury stock carries no voting or dividend rights, and is considered issued, but not outstanding. See Authorized Shares, Issued Shares,Outstanding Shares.

TRIPLE TAX EXEMPT

A loan or security whose income is not subject to either federal, state, or local taxes.

TRUNCATION

As used in check clearing, it refers to the bank of first deposit retaining the physical check, with the information on the check being processed electronically or via image processing. See Safekeeping.

TRUST

A general term meaning the managing of the assets of others. Services that banks would consider as trust services include executor, administrator, investment management, and trustee.

Trust also has a specific legal meaning, denoting an arrangement whereby a trustee takes legal title to assets to be managed for the benefit of beneficiaries within a fiduciary rela­tionship.

TRUST COMPANY

A company chartered to engage in the trust business. Almost all banks have trust powers, and there are very few pure trust companies today that offer only trust (and not traditional banking) services.

TRUST INDENTURE ACT

TIA. A 1939 act of Congress that specifies that most corporate debt securities sold publicly in the US must be issued under an indenture and have a trustee to enforce the terms of the indenture, in order to protect the holders of the security. It also sets minimum standards for the trustee.

TRUSTEE

One who holds legal title to assets to be managed for the benefit of others. See Equip­ment Trust Certificate, Indenture Trustee, Trust.

TRUTH IN LENDING ACT

See Regulation Z.

TRUTH IN SAVINGS ACT

See Regulation DD.

TT

Telegraphic transfer.

12b-1 FEE

A fee charged by some mutual funds to its fundholders, to pay for the cost of marketing the fund, the theory being that more fundholders will result in lower expenses for each fund­holder.

TXP

A form of ACH transaction used by a company to make tax payments via the ACH.

That part of the Uniform Commercial Code that covers the rights and responsibilities of parties to a funds transfer.

UCITS

Undertakings for Collective Investments in Transferable Securities. These are essentially a non-US equivalent of mutual funds.

UCP

See Uniform Customs and Practice.

UIT

See Unit Investment Trust.

UNCOLLECTED FUNDS

See Float.

UNCOMMITTED FACILITY

A loan commitment not evidenced by a legal, written contract between the bank and borrower, but rather only the bank’s good faith efforts to lend money. See Committed Facility.

UNCOVERED

See Naked.

UNDERLYING

The security, currency, index, or commodity on which an option contract is written.

UNDERWRITING

Securities underwriting: the process of distributing securities whereby the securities are purchased from the issuer by an interme­diary (the underwriter), who assumes the risk of reselling them into the marketplace at a markup. In a competitive underwriting, various underwriters bid against one another for the business; a negotiated underwriting is where a single underwriter is chosen, and the price is negotiated with them.

Insurance underwriting: the assumption of the risk being insured against, in exchange for the insurance premium.

Credit underwriting: analyzing the creditworthiness of the borrower.

UNFUNDED COMMITMENT

Commitment overhang. The amount of money that a bank is contractually (legally) obligated to lend, should its borrowers request it, over and above what it has already lent.

UNIFORM COMMERCIAL CODE

UCC. The body of law in the US that covers banking and other commercial transactions. The UCC is adopted by each state individually, and there are sometimes differences between the versions adopted by the various states.

UNIFORM CUSTOMS AND PRACTICE

UCP. Uniform Customs and Practice for Docu­mentary Credits. The set of international guidelines covering letters of credit. Developed by the International Chamber of Commerce. The most recent version is UCP 600, effective 2007.

UNIT INVESTMENT TRUST

UIT. A form of pooled investment vehicle similar in concept to a mutual fund. A set of securities (generally bonds) is purchased when the trust is formed, and the pool then remains fixed. No trading takes place. Barring defaults of the underlying securities, the return and maturity date are known in advance and management costs are reduced. The securities are considered to be administered, rather than managed.

UNIT TRUST

Essentially, mutual funds in the UK.

UNIVERSAL BANKING

The concept of providing banking, insurance, and securities services all within one financial services group. In Germany, Allfinanz.

UP AND IN/OUT

See Barrier.

UPTICK

A securities trade made at a higher price than the previous trade. See Downtick, UptickRule.

UPTICK RULE

US stock exchange rule under which a short sale may not be made on a downtick. This rule was revoked in 2007.

US TREASURY OBLIGATIONS

A generic term for the borrowings of the US government. Usually in the form of treasury bills, notes, or bonds, and considered the highest grade (i.e., lowest credit risk) of all securities.

USD

SWIFT currency code for the US dollar.

USE OF FUNDS

A way of using money. For a bank, loans are generally the principal use of funds.

USURY RATE

An interest rate on loans (generally set by state law), above which it is illegal for a bank to charge. Usually applies only to consumer transactions.

VaR. A risk management tool for attempting to determine, at some prespecified confidence level (typically 95 or 99%), the maximum amount a company’s value could decline for given changes in the markets. Often used synonymously with Earnings at Risk.

VAR

See Value at Risk.

VARIABLE ANNUITY

An annuity whose annual payments are a function of the return of some set of invest­ments, typically mutual funds, and which therefore may vary. See Fixed Annuity.

VARIABLE RATE

See Floating Rate.

VARIATION MARGIN

See Margin.

VAULT CASH

The currency and coin literally in the vault. Vault cash is counted towards satisfaction of a bank’s reserve requirement.

VEGA

The amount by which the price of an option changes for a given change in the volatility of the underlying.

VENTURE CAPITAL

Providing financing to a (generally) small, start-up company. Due to the risks involved in early-stage financing, venture capitalists expect a return significantly above what less-risky investments would offer.

VINTAGE YEAR

The initial year of operation of a private equity fund.

VIX

The average volatility of a number of near-term, near- and at-the-money put and call S&P 500 index options. Computed by the CBOE.

VOLATILITY

As used in options pricing, it refers to the size of the price fluctuations of the underlying. Technically, the standard deviation of the percentage price changes of the underlying.

VOSTRO

Vostro account. A due to banks account. It is the other bank’s nostro account. Sometimes called a loro account.

VULTURE FUND

An investment pool that invests in the secu­rities of troubled, bankrupt, or nearly bank­rupt companies.

Weighted average coupon. The average interest rate of a pool of mortgages. See WAM.

WAM

Weighted average maturity. The average remaining maturity of a pool of mortgages. See WAC.

WARRANT

A security issued by a company giving its stockholders the ability to purchase additional shares, often at a price below the market, for a long period of time. The warrants may often be traded in the marketplace. See Right.

WEIGHTED AVERAGE COUPON

See WAC.

WEIGHTED AVERAGE MATURITY

See WAM.

WEST TEXAS INTERMEDIATE

The deliverable grade for the NYMEX crude oil contract. Sometimes called Light Sweet due to its low sulfur and viscosity properties.

WHEN ISSUED

WI. Securities which trade prior to their actual issuance, and subject to their issuance.

WI

See When Issued.

WILL

A statement as to how one’s estate is to be distributed after death.

WILSHIRE INDEX

An indicator of stock prices similar in concept to the DJIA or S&P 500, but including essentially the entire universe of stocks in the US, rather than a small subset as in the other two.

WINDOW DRESSING

Cleaning up the balance sheet for the last day of the fiscal year (statement date).

WIRE HOUSE

Somewhat archaic name formerly used to designate the major full-service stockbrokers.

WIRE TRANSFER

See Funds Transfer.

WORKING CAPITAL

Defined as current assets – current liabilities, it represents the money a company has available for day-to-day operations (as opposed to for longer-term investment purposes). For these purposes, current usually means due in 1 year or less.

WORKOUT

The process of collecting loans which are in or near default. Usually requires special exper­tise on the part of bank personnel.

Current yield. The annual income on an investment, as a percentage of its market price.

YIELD CURVE

The relationship between the yield to matu­rity on an investment and its time to maturity. If a longer time to maturity gives a greater yield, it is a normal (positive) yield curve, whereas if the shorter maturities result in a greater yield it is an inverted (negative) yield curve.

YIELD TO MATURITY

The total annual return on a debt invest­ment, taking into account interest received as well as any change in price.

A form of checking account offered to corporations by banks as part of a cash management system. Any surplus (deficit) funds in the account at the end of the day are transferred to (from) another account, to keep the closing balance at zero.

ZERO COST COLLAR

See Collar.

ZERO COUPON BOND

A bond which pays no periodic interest (has a zero coupon). All of an investor’s return is built into the increase in price from purchase to maturity. Since no income is received on an ongoing basis, zeros sell at a very deep discount.